Tax technical updates: PwC’s LiFTS memos

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.

October 2009

VAT changes that will impact law firms
On January 1, 2010 law firms with offices in the EU which make taxable supplies of legal services to business customers in other EU countries will have new monthly VAT reporting obligations. Failure to comply with these monthly reporting obligations can result in severe penalties being imposed.

Additional LiFTs memos

September 2009
UK Finance Act 2009 impacts US law firms operating in the UK
The 2009 finance bill, which received Royal Assent on July 21, 2009 and was enacted as Finance Act 2009, contains a number of elements which will have a significant impact on US law firms operating in the United Kingdom.

August 2009

New Jersey ruling on credit determination
New Jersey tax court finds for resident partner of large US partnership — Taxpayer correctly calculated credit for personal income taxes paid to other state.

The Israeli legal market is opening to foreign firms
Israel has opened its legal market to allow for foreign lawyers and law firms to practice law in Israel. Foreign lawyers will be allowed to provide advice and legal opinions of the law in the country in which they are authorized to practice, but cannot practice Israeli law.

New York provides group filing options for the Metropolitan Commuter Transportation Mobility Tax — Update to May 2009 Law Firm Services memorandum
In May 2009, the New York State Senate passed legislation to enact the Metropolitan Commuter Transportation Mobility Tax ("MCTMT"). At the time the MCTMT was signed into law, the New York State Department of Taxation and Finance, who administers the tax, did not provide a method for group filings. The Department has now released guidance providing partnerships the ability to file a group MCTMT return and make estimated payments for all participating partners, as well as for non-participating nonresident partners.

July 2009
Recent developments on taxation of law firms in China
Recent changes in requirements for paying China's business tax and corporate income taxes have substantially increased the complexity for law firms doing business in China. Similarly, China's new TPD requirements present an additional burden for firms that routinely provide services to clients located in China.

May 2009
New York enacts payroll tax on employers and self-employed individuals
Events are continuing to unfold regarding the new Metropolitan Commuter Transportation Mobility Tax, including the need for law firm partners to make individual estimated payments and filings (no composites) on their share of income from New York City and surrounding counties.

April 2009
People's Republic of China changes business tax filing requirements to reach international law firms providing services to clients located in China
China has expanded the legal services that are subject to their 5% business tax and retained the sourcing rules of Circular 82. This will have a direct impact on firms providing services in China as well as services provided outside China for clients in China.

March 2009
India enacts LLP statute
With the passage of an LLP statute, India has moved another step closer to opening the market for foreign law firms. The LiFTS memo attached summarizes the new statute and the new ability for foreign firms to open office in India.

Federal, state and local government entities required to withhold 3% on payments for services
The IRS has issued new proposed regulations that will require federal, state and local governments to withhold tax on payments for services. Law firms that perform services for government entities, such as bond offerings, will be impacted by these new regulations.

February 2009
Taxation in India of foreign law firms
India continues to be a challenge. This recent court ruling should bring a more reasonable approach to determining what is taxable in India.

New York State has expanded the scope of its residency rule by eliminating the "temporary stay" safe harbor.
New York State expands the scope of its residency rule and who must file a return with the elimination of the "temporary stay" safe harbor.

January 2009
France expands reach of social contributions tax to certain individuals with non-French source income
Beginning January 1, 2009, France will levy a social contribution tax on individuals with non-French source income that is normally exempt from French tax under a treaty or other international agreement. The social contribution would apply to French tax residents and non residents subject to the French social security system in connection with their professional service income.

December 2008
Internal Revenue Service issues revised foreign account reporting form
In light of the recent scandal involving a well-known foreign bank’s involvement with American taxpayers that the Internal Revenue Service ("IRS") believes may have avoided certain reporting rules, the IRS is increasing its oversight of accounts held by American taxpayers with foreign banks. The IRS has recently posted a version of Treasury Form 90-22.1, "Report of Foreign Bank and Financial Accounts," on its Website. This form changes the filing requirements for, and definitions of, people with any financial interest in or authority over qualifying foreign financial accounts. This form must be used for any filings made after December 31, 2008.

March 2008
German Federal Fiscal Court decision dated October 17, 2007 on the subject-to-tax clause in the DTT Italy
The German Federal Fiscal Court stated in its decision dated October 17, 2007 that Art. 24 para. 3 letter a of the 1989 double tax treaty between Italy and Ger-many (DTT Italy) contains a subject-to-tax clause. This decision could have an impact on structures established to create "white income" which rely on the interpretation that the 1989 DTT USA (in effect until the end of 2007) does not contain an effective subject-to-tax clause.

Proposed UK legislation will institute yearly £30,000 charge to remittance-based, non-domiciled taxpayers
From April 6, 2008, a claim for the remittance basis will need to be made by all UK residents who are eligible to claim and who wish to be taxed on that basis in relation to employment income, investment income and capital gains.

August 2007
New York State 2007 tax legislation affecting personal service corporations
New York has enacted aggressive legislation against attorney-owners of personal service or S-corporations who are not residents of New York. The LiFTS memo explains this change and how it is likely to be applied.

July 2007
Changes in French tax treatment of UK limited liability partnerships (LLP) distribution
A ruling from French authorities that signals changes in the tax treatment of distributions for UK limited liability partnerships in France. This memo discusses the scope of the recent ruling that initiated the change and its ramifications for UK firms considering an LLP conversion or those already in or contemplating alliances with French firms.

February 2006
Reducing withholding on nonresident alien partners by utilizing individual partner losses
Treasury regulations now allow, under certain circumstances, for foreign partners to certify deductions and losses to a partnership in order to deduct the withholding tax imposed under Internal Revenue Code Section (IRC Sec.) 1446. Moreover, the regulations now permit partnerships to consider the relevant type of income or gain when determining the highest rate of tax to apply against the effectively connected income.

January 2006
Updated NYS exemption certificates
The New York State Department of Taxation and Finance ("Department") issued forms that must be completed and signed by each nonresident person or entity claiming exemption from the New York State withholding rules. All existing certificates expire February 1, 2006. The certificates apply to tax years 2006 & 2007 and will expire on February 1, 2008. Access the corporate and individual forms below.

December 2005
IRS audits for Section 1441 compliance may affect law firms
In 2005, the IRS targeted other taxpayers (e.g., banks, broker dealers, insurance companies, etc.) for Section 1441 audits. Now, we believe that the IRS is starting to focus on law firms. Some proactive planning/defense may be helpful.