The Administration Offers Its Long-Awaited International Tax Proposals

Excerpt from Practical US/International Tax Strategies by Joseph B. Darby III (Greenberg Traurig LLP)

Earlier this month, the Obama Administration issued its long-awaited (and in some quarters, deeply dreaded) proposals for changes to U.S. international taxation. The Proposals were delivered, not in the form of meaty and complex legislation, but rather in a short, breezy, and at times maddeningly vapid news release. Still, the stakes are so high and the timing so crucial that it is hard not to try to extract some kind of deeper meaning from this relatively cursory pronouncement. First the good news: The Proposals do not, as many feared, recommend an outright repeal of all “deferral” with respect to the U.S. federal income taxation imposed on U.S. taxpayers that own foreign corporations. At the moment, U.S.-owned foreign corporations are subject to the so-called “anti-deferral” tax regimes, contained in Subpart F of the Code (controlled foreign corporation or “CFC” rules) and in Code Section 1291 et. seq., (Passive Foreign Investment Corporation, or “PFIC” rules). The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact.

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Administration Offers Its Long-Awaited International Tax Proposals

Excerpt from Practical US/International Tax Strategies by Joseph B. Darby III (Greenberg Traurig LLP)

On May 4, 2009, the Obama Administration (Administration) issued its long-awaited (and in some quarters, deeply dreaded) proposals for changes to U.S. international taxation.

The Proposals were delivered, not in the form of meaty and complex legislation, but rather in a short, breezy, and at times maddeningly vapid news release. Still, the stakes are so high and the timing so crucial that it is hard not to try to extract some kind of deeper meaning from this relatively cursory pronouncement. First the good news: The Proposals do not, as many feared, recommend an outright repeal of all “deferral” with respect to the U.S. federal income taxation imposed on U.S. taxpayers that own foreign corporations. At the moment, U.S.-owned foreign corporations are subject to the so-called “anti-deferral” tax regimes, contained in Subpart F of the Code (controlled foreign corporation or “CFC” rules) and in Code Section 1291 et. seq., (Passive Foreign Investment Corporation, or “PFIC” rules). The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact.

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Stricter Reporting Requirements for U.S. Transferors of Property to Foreign Corporations

Excerpt from Practical US/International Tax Strategies by Andy Sikora and Joel Mitchell (BDO Seidman, LLP)


The Internal Revenue Service has issued revised Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report exchanges of property with or transfers of property to a foreign corporation. The updated form requires greater detail regarding the property transferred and the tax consequences associated with the transfer. Form 926 is required for any United States person, corporation, estate, or trust that has exchanged property with, or transferred property to, a foreign corporation during the transferor’s taxable year in a transaction described in section 6038B(a), 367(d), or 367(e). Among others, affected transfers include transfers of cash (special rules may apply), stock, accounts receivable, intangible property, inventory, and depreciable assets. Revised Form 926 was released by the Service in February 2009 and contains a revision date of December 2008.

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China Issues Detailed Guidance on Anti-Avoidance Rules

Exerpt from Practical China Tax and Finance Strategies, published by WorldTrade Executive, Inc.

China’s new 2007 Enterprise Income Tax Law, for the first time in Chinese tax history, introduced a set of anti-avoidance rules in its Special Tax Adjustments chapter, which include not only transfer pricing and advanced pricing agreement rules but also rules on cost sharing agreements, thin-capitalization, controlled foreign corporations, and general anti-avoidance.

On January 8, 2009, the SAT released long-awaited Circular Guoshuifa [2009] No 2, Implementation Measures of Special Tax Adjustments (Trial) that details rules on administrating all the aspects of those anti-avoidance rules. If the Special Tax Adjustments chapter represents the first anti-voidance legislation in China, Guoshuifa [2009] No 2 can be viewed as the first comprehensive operating manual of anti-avoidance administrations in China. All the provisions in Guoshuifa [2009] No 2 take retrospective effect from January 1, 2008.

As the starting point of the anti-avoidance administration, Guoshuifa [2009] No 2 restates that all enterprises shall file the following nine forms annually to report related party transactions:

Form 1 - Related party relationships
Form 2 - Summary of related party transactions
Form .3 - Purchases and sales
Form 4 - Labor services
Form 5 - Intangible assets
Form 6 - Fixed assets
Form 7 - Financing
Form 8 - Outbound investments
Form 9 - Outbound payments

Those forms require enterprises to indicate whether they have contemporaneous transfer pricing documentation in place. The forms need to be filed together with the annual enterprise income tax return. For the tax year of 2008, the filing deadline is May 31, 2009.

Read More for a Summary of Transfer Pricing Documentation

Latin American Planning Opportunities under Tax Treaties

Excerpt from Practical Latin American Tax Strategies
by John A. Salerno (PricewaterhouseCoopers LLP)


Latin America has historically not been regarded as a region with an extensive network of income tax treaties. During the 1960s only four income tax treaties were in effect, two of which were with Sweden. With Brazil leading the way, the 1970s and 1980s saw the conclusion of several additional tax treaties, but it was not until recent years that the negotiation and conclusion of tax treaties with Latin American nations began to flourish.

During the 1990s and early 2000s, rapid economic growth and political reform in Latin America’s largest economies fueled a wave of investment by multinational companies based in Europe and the United States. As economies grew and foreign investment restrictions were eased, funds began to flow freely into Latin American markets. The discernible increase in investment spurred the negotiation and conclusion of a number of tax treaties with nations both within and outside the region.

Click here to view a summary of current income tax treaties in force and selected treaties that are either pending, under negotiation or with negotiations pending (free):

France and the United States Sign a Protocol Amending the Income Tax Treaty

Excerpt from Practical US/International Tax Strategies by Gauthier Blanluet, Andrew P. Solomon, Willard B. Taylor, Aditi Banerjee and Nicolas de Boynes (Sullivan & Cromwell LLP)

On January 13, 2009, France and the United States signed a protocol (the “Protocol”) amending the income tax treaty signed by the two countries in 1994, as amended by a 2004 protocol (the “Existing Treaty”).

The Protocol generally eliminates withholding tax on dividends paid to shareholders holding at least 80 percent of the distributing company and generally eliminates the branch profits tax. It also eliminates withholding on royalties for the use of intangible property. The Protocol provides for mandatory arbitration of certain cases that are not resolved by the competent authorities within a specified period of time, clarifies the treatment of certain fiscally transparent and pass-through entities, imposes stricter requirements for certain companies to qualify for the benefits of the treaty, and updates the rules for the exchange of taxpayer information between the tax authorities of each country. These changes will align the Existing Treaty more closely with more recent U.S. tax treaties.

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Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by Jonathan A. Sambur, Kenneth Klein, Patricia Anne Rexford, John T. Hildy and Rafic H. Barrage (Mayer Brown)


On December 24, 2008, the US Treasury and the IRS released final, temporary and proposed regulations relating to the application of the subpart F foreign base company sales income (FBCSI) rules to contract manufacturing arrangements.

These regulations finalized certain of the proposed regulations relating to this subject that were originally released on February 27, 2008. Also issued were temporary and proposed regulations that modify other of the February 27 proposed regulations. The text of the newly proposed regulations is the same as the corresponding temporary regulations.

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IRS Issues Revised Cost Sharing Regulations

Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by David G. Noren, Paul Dau, Roderick K. Donnelly and John G. Ryan (McDermott Will & Emery)

Taxpayers that have relied on cost sharing arrangements under the 1996 regulations must consider whether and how such reliance will be viable in the future under the new regulations.

On December 31, 2008, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued temporary regulations making fundamental changes to the 1996 rules governing qualified cost sharing arrangements (CSAs). These changes are relevant not only to taxpayers that rely on CSAs, but also to taxpayers that have never implemented a CSA, as Treasury and the IRS have provided for application of the principles of the new regulations to intangible development arrangements in general.

The new regulations are based on regulations proposed in 2005, which have been the subject of considerable discussion and controversy. The new regulations are generally effective as of January 5, 2009, subject to limited transition relief for certain preexisting CSAs. The new regulations also were issued in proposed form and will be the subject of a public hearing scheduled for April 21, 2009.

Read More on How Buy-in Payments Will Be Affected

Recent Developments in Mexican Rulings and Administrative Decisions

Exerpt from September/October 2008 Issue of Practical Mexican Tax Strategies by Terri Grosselin and Santiago Chacon (Ernst & Young)

Recent actions by the Mexican Ministry of Economy and the tax administration indicate a change in policy with respect to companies operating under the popular Maquiladora regime. Although the tax benefits for companies operating in the regime are being carried forward, it appears compliance with the terms of the program will be more strictly monitored.

In 2006, Mexico’s Maquiladora program was combined with other export regimes as part of the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industries (“IMMEX Decree”). The Ministry of Economy is the Mexican agency in charge of granting and monitoring permits to IMMEX companies. So far during 2008, this agency, in close cooperation with the Mexican tax authorities, published a list of a total of 1,342 companies with an IMMEX program that were not compliant with one or more of the requirements to operate under the IMMEX regime for 2006 and 2007. The implication for entities included in this publication, is the possible suspension of certain rights granted under the program with the risk that the IMMEX permit will be cancelled altogether, unless the companies rectify identified deficiencies in a short time frame.

Read More on the impact of non-compliance with IMMEX regulations

IRS Provides Temporary Relief under Subpart F in Response to the Liquidity Crisis

Excerpt from Practical US/International Tax Strategies by Edward Tanenbaum and Diana Wessells (Alston & Bird LLP)

Treasury and the IRS issued Notice 2008-91, which provides temporary and limited relief to a particular aspect of Section 956, in connection with the current liquidity crisis. Under Sections 951 and 956, a U.S. shareholder of a controlled foreign corporation (CFC) is subject to tax on the amount equal to the lesser of (1) the U.S. shareholder’s pro rata share of the average of the amounts of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the taxable year, less the amount of earnings and profits previously included in the U.S. shareholder’s gross income, or (2) the U.S. shareholder’s pro rata share of the applicable earnings of the CFC. The effect of these provisions is to treat the U.S. shareholders of the CFC as receiving the amount invested in U.S. property as a constructive dividend. Section 956 is consistent with the other provisions of subpart F insofar as it is intended to prevent the tax-free repatriation of earnings.

Read More on Relief Provided by Notice 2008-91 (free)