A Flurry Of Activity
Kitty Miv, Editor
07 November, 2019
As the political turmoil continues unabated in the United Kingdom in the run-up to the December 12 general election, it occurs that the United States has been sadly neglected in this column in the last weeks and months, an oversight that we will now seek to rectify.
This is made easier by a relative flurry of tax and business-related activity in the US over the past couple of weeks, including the announcement in late October that the House of Representatives had approved bipartisan legislation that would require certain new and existing small corporations and limited liability companies to disclose information about their beneficial owners.
The bill, known as the Corporate Transparency Act of 2019, was sponsored by Carolyn B. Maloney (D-NY) and co-sponsored by Peter King (R-NY) and Tom Malinowski (D-NJ).
Under the proposed legislation, certain entities applying to form a corporation or limited liability company would have to file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). Additionally, certain existing corporations and limited liability companies would have to file this information with FinCEN two years after the implementation of final regulations required under the bill.
The bill defines a beneficial owner as an individual who:
- exercises substantial control over a corporation or limited liability company;
- owns 25 percent or more of the interest in a corporation or limited liability company; or
- receives substantial economic benefits from the assets of a corporation or limited liability company.
The bill imposes a civil penalty and authorizes criminal penalties for providing false or fraudulent beneficial ownership information or for willfully failing to provide complete or updated beneficial ownership information. These include a fine, a prison term of up to three years, or both.
Then on October 31, 2019, the Treasury and the IRS issued final regulations removing documentation regulations under Section 385, which form part of measures intended to deter corporate inversions.
The final regulations under Section 385, released in October 2016, are intended to limit earnings stripping following inversions – a practice whereby US subsidiaries borrow from their new foreign parent company (or another foreign affiliate), increase their interest payments, and reduce their US taxable income by using the interest expense deduction. Under the regulations, the IRS would be allowed to re-characterize certain debt instruments as equity under Section 385 of the Internal Revenue Code.
The final and temporary regulations under Section 385 are primarily comprised of:
- the documentation regulations, which establish minimum documentation requirements that ordinarily must be satisfied in order for purported debt obligations among related parties to be treated as debt for federal tax purposes; and
- rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result.
The documentation regulations would have been applicable with respect to interests issued or deemed issued on or after the date the regulations were finalized. However, applicability was delayed until January 1, 2018, in response to taxpayer concerns of inadequate time to begin complying with the documentation regulations once they were finalized. Subsequently they were delayed until January 1, 2019, as a result of the review mandated by President Donald Trump into burdensome regulations.
After considering the pros and cons of the regulations, the Treasury Department and the IRS determined that the burdens imposed on taxpayers by the regulations outweigh their intended benefits. However, while the notice adopts the proposed regulations to revoke the section 385 documentation requirements with no changes, the document states that the Treasury Department and the IRS continue to consider the issues addressed by the documentation regulations. After further review, a modified version of the documentation regulations may therefore be proposed.
Both departments have stated that they welcome comments regarding possible new approaches to the documentation requirements. They have further sought to reassure taxpayers that any modified version of the regulations would be proposed with a prospective effective date to allow sufficient lead time for for systems to be designed and implemented to comply with them.
Turning finally to cross-border tax matters, it emerged that the United States is considering whether to extend exclusions that waive the 25 percent import tax on certain Chinese goods.
Effective July 6, 2018, the US Trade Representative imposed additional duties of 25 percent on goods from China with an annual trade value of approximately USD34bn. As part of a process launched in July 2018 and concluded in December 2018, the US excluded a number of Chinese products. These exclusions are set to expire on December 28, 2019. The USTR has therefore launched a new process to consider whether these exclusions should be extended for another 12 months.
The USTR began consulting on the matter on November 1, with comments required to be submitted by the end of this month.
According to the notice, the USTR will evaluate the possible extension of each exclusion on a case-by-case basis. The focus of the evaluation will be whether, despite the first imposition of these additional duties in July 2018, the particular product remains available only from China. Feedback has been sought specifically on:
- Whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
- Any changes in the global supply chain since July 2018 with respect to the particular product, or any other relevant industry developments.
- The efforts, if any, the importers or US purchasers have undertaken since July 2018 to source the product from the United States or third countries.
Until next week!
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