Please read below for highlights on new legislation, discussions of relevant tax cases, analysis of revenue rulings and procedures, and insight as to how these developments may impact your firm and/or its partners.
Alabama recently enacted a bright-line "factor presence" nexus standard for tax years beginning after December 31, 2014.
Firms with partners resident in Kansas will be interested in Kansas Notice 15-15, which confirms Kansas' adherence to the recent US Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne.
Amnesty Programs Begin in 8 States
In the second half of 2015, amnesty programs will begin in eight different states. Arizona, Kansas, Maryland, and Missouri have all enacted legislation adopting amnesty programs commencing on September 1, 2015, while amnesty programs in Indiana and Oklahoma will begin mid-September. Two other states -- Louisiana and South Carolina -- are offering amnesty programs later this year. In addition, Massachusetts has approved an amnesty program for early 2016.
FBAR Due Date Advanced 3 Months Beginning With Reports for Calendar Year 2016; New 6-month Extension to be Provided; Penalty Waiver Available for First-time Filers
In addition to changing the due date for the filing of a partnership's Form 1065 return and a corporation's Form 1120 return for tax years beginning after December 31, 2015, among other tax filings, the recently enacted federal highway bill has also changed the filing due date for the FBAR - Foreign Bank Account Reporting - form.
Recently Enacted Short Term Highway Bill Includes Changes to Tax Filing Due Dates for Businesses
On Friday, July 31st, President Obama signed into law the short term highway bill. The bill includes modifications to the tax filing deadlines for partnerships, S corporations and C corporations for tax years beginning after December 31, 2015.
Proposed Regulations May Affect the U.S. Tax Treatment of Certain Guaranteed Payments Made to Law Firm Partners
On July 22, 2015, the Treasury Department ('Treasury') and the IRS issued proposed regulations (REG-115452-14) under Section 707(a)(2)(A) addressing when an arrangement with a service provider structured as an allocation (typically of net capital gain or qualified dividend income) and a distribution may be recharacterized as a disguised payment for services (treated as compensation income). The proposed regulations were anticipated for several months and were expected to target management fee waiver arrangements. However, the guidance is broader than anticipated and its applicability appears to extend beyond management fee waiver arrangements.
Connecticut, Georgia, Missouri, Tennessee, Texas and Puerto Rico have recently made changes to their local tax systems which have the potential to affect US law firms
Several states - Connecticut, Georgia, Missouri, Tennessee & Texas - and Puerto Rico have recently made changes to their local tax systems which have the potential to affect US law firms.
UK Highest Court’s Recent Ruling in Anson v Commissioners for Her Majesty's Revenue and Custom may Affect UK Tax Treatment of US LLCs Utilized in Structuring the UK Operations of US Law Firms and UK Partners that hold an Interest in a US LLC
The UK Supreme Court has held that a UK individual (Anson) is entitled to double taxation relief in the UK for US tax paid on profits of a Delaware Limited Liability Company (LLC) in which he is a member. Based on the First Tier Tribunal’s (FTT) earlier finding of fact that the members of the LLC have an interest in the profits of the LLC as they arise, the Supreme Court held that Mr. Anson's UK tax liability is computed by reference to the same income that was taxed in the US, and he is therefore entitled to relief from double taxation under the terms of the UK-US income tax treaty.
Following up on the U.S. Supreme Court's decision in Wynne-- Potential Application to States Other than Maryland
As reported in our May 19th PwC Law Firm Services (LFS) News Alert on the Wynne decision, the U.S. Supreme Court recently upheld a Maryland Court of Appeals' ruling that Maryland's absence of a credit against the local portion of the state’s personal income tax, with respect to a Maryland resident’s out-of-state pass-through income from an S corporation, was unconstitutional.
Nevada Enacts Commerce Tax affecting Nonresident Law Firms with Nevada Clients and a Certain Annual Dollar Threshold of Business
Nevada recently enacted an annual commerce tax which will require any law firm partnership or company with Nevada apportioned gross income exceeding $4 million to pay an annual commerce tax to the State. The tax is akin to a gross receipts tax. Effective July 1, 2015, the Commerce Tax rates vary from 0.051% to 0.331%. Law firms with Nevada business in excess of the $4 million threshold should consider how to adjust their reporting processes to comply with the Commerce Tax’s July 1 – June 30 reporting year and the relatively brief period (75 days with an extension) under which to report and pay the tax to Nevada.
U.S. Supreme Court finds Maryland's failure to provide a tax credit to residents for the local portion of personal income tax for out-of-state income to be in violation of "dormant" Commerce Clause and thereby unconstitutional.
In a 5-4 decision issued May 18, 2015, the United States Supreme Court has upheld a Maryland Court of Appeals' decision that Maryland's absence of a credit against the local portion of the state’s personal income tax, with respect to a Maryland resident’s out-of-state pass-through income from an S corporation, is unconstitutional. See Maryland State Comptroller of the Treasury v. Wynne, Slip Op. 13-485 (May 18, 2015).
New UK Filing Obligation for Short Term Business Visitors due by May 31, 2015.
Changes to reporting requirements over recent years and increased scrutiny from Her Majesty’s Revenue & Customs (“HMRC”) means that firms with employees who come to the UK for work trips need to review their internationally mobile population and reporting obligations. All firms with visiting foreign employees need to have a short term business visitor agreement in place, and ensure that the requirements of that agreement are met. Firms with agreements in place need to ensure that their annual report is completed and submitted to HMRC by May 31, 2015.
Changes in New York Law will affect Law Firms with Corporate Partners that are C corporations or Foreign Corporations, and Law Firms that operate as C corporations or Foreign Corporations.
On April 13, 2015, Governor Andrew Cuomo signed into law legislation that reforms New York City’s corporate tax structure to resemble many of the state changes that were enacted last year. C corporations will be subject to a new corporate tax (hereinafter referred to as the “revised tax”), effective for tax years beginning on or after January 1, 2015. However, S corporations (hereinafter, “S corps”) and LLCs taxed as partnerships will not be subject to the revised tax. S corps and partnerships will be subject to a separate tax reform of the Unincorporated Business Tax which is still under study by the New York City Department of Finance.
Mutual Agreement between the USA and Kazakhstan on Fiscally Transparent Entities
Prior to 2015, the Kazakh tax authorities did not permit US partnerships, LLCs or S Corporations to claim the benefits available under the Double Tax Treaty between the United States and Kazakhstan (hereinafter, the “DTT”). As such, the acceptance of tax residency certificates from such entities and the way Kazakhstan taxes were withheld or paid by such fiscally transparent entities was problematic.
On February 2, 2015, a Mutual Agreement between the competent authorities of the United States and Kazakhstan (the “Agreement”) was publicly announced, establishing the eligibility of fiscally transparent entities - US partnerships, LLCs and S Corporations - to claim the benefits available under the DTT. The Agreement states that fiscally transparent entities are entitled to DTT benefits and clarifies the associated application procedures.
Partner compensation included in San Francisco payroll tax base; will impact returns due March 2, 2015
The California Court of Appeal, First District, has upheld the City of San Francisco’s position that distributions to owners of pass-through entities are subject to inclusion in the payroll expense tax base of the San Francisco business tax. Among other arguments, the law firm partnership/taxpayer asserted that since distributions to partners were not guaranteed payments of compensation, they should not be included in the payroll expense base. The court concluded, however, that some portion of the distributions include ‘compensation for services’ that should be included in the payroll expense base. [Coblentz, Patch, Duffy and Bass LLP v. City and County of San Francisco, Cal. Ct. App., A135509, certified for publication, 1/22/15].
Massachusetts releases final regulations outlining market based sourcing rules
The Massachusetts Department of Revenue (Department) recently promulgated a new apportionment of income regulation (830 CMR 63.38.1) that provides specific market based rules with respect to apportioning receipts from services and transactions involving intangible property. The new regulation finalizes, with some changes, the proposed regulation released this fall (click here for our summary). Although the new regulation was promulgated on January 2, 2015, the statutory change adopting the market based sourcing approach became effective for tax years beginning on or after January 1, 2014. Prior to the statutory change, Massachusetts apportioned these receipts under a ‘cost of performance’ methodology.
Recent French Supreme Court Decision Will Impact Partners in France
The French Supreme Court has held that the self-employed partners of a US law firm operating in France, who receive income from both French and foreign sources, are subject to family allowance contributions on their income from both French and US sources. This decision was rendered prior to the long-awaited appellate court re-hearing on the Crosthwaite case dealing with similar issues but under applicable European Regulations (which is presently postponed until May 2015).
The French Tax Authorities have released the final version of the "light" transfer pricing documentation form
The Law against tax fraud and economic financial crime dated December 6, 2013, introduced new transfer pricing documentation filing obligations. French entities subject to the contemporaneous transfer pricing documentation requirements, pursuant to Article L13AA of the French Tax Procedures Code, are required to file with the French Tax Authorities ("FTA") a document providing specific information on their transfer pricing policy.
A new form has been issued for complying with this requirement. For most US law firms operating in France, for fiscal year 2013 this form must be filed by November 20, 2014.
South Korea is expected to extend for an additional 2 years the 18.7% flat rate of income tax currently available to foreign expatriate workers
Foreigners working in Korea can generally elect to have their employment income taxed at a flat rate of 18.7% (including resident surtax) rather than the normal progressive income tax rates of between 6.6% to 41.8% (including resident surtax). The 18.7% rate is currently subject to a sunset clause and expires on December 31, 2014.
Changes to New York’s Metropolitan Commuter Transportation Mobility Tax will affect US Law Firms and their Partners Subject to this Tax
A recent change by New York State to the Metropolitan Commuter Transportation Mobility Tax (“MCTMT”) will affect US law firms and their partners in several respects: the due dates for making estimated payments and the annual filing have changed for some taxpayers, as well as the method of filing this tax by effectively combining the MCTMT with the personal income tax filing; New York residents must pay their own MCTMT and may no longer be a member of the MCTMT group return; NY nonresidents must either file their own MCTMT return or join the New York Group Returns for Nonresident Partners (Form IT-203-GR) and report both personal income and MCTMT on this group return, as it appears that nonresident partners will no longer be able to make differing group elections for personal income tax versus MCTMT purposes; and, the law firm partnership must withhold on each nonresident partner that is not participating in the New York Group Returns for Nonresident Partners (Form-IT-203-GR), unless the partner meets one of the exceptions.
Mexico’s Tax Authorities Announce Rules for Entities’ Standard Electronic Accounting
On July 4, the Mexico tax authorities published the Second Resolution of Modifications to the Miscellaneous Tax Resolution (“MTR”) for 2014 in the Official Gazette, which includes rules concerning compliance and delivery of electronic accounting records via electronic media.
The tax authorities specify deadlines for the delivery of trial balances and the catalog of accounts using the XML file format. The authorities may also request information on accounting vouchers issued.