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.
HMRC Partnerships Taxation Clarification
Her Majesty's Revenue and Customs (HMRC) have published the consultation into certain aspects of partnership tax which was announced in the March 2016 budget. The proposals are largely focused on administrative matters. However, it is possible that the proposals in relation to the allocation of profits could require firms to makes changes to the way in which profits are allocated for UK tax purposes in the future.
ITIN: Protecting Americans From Tax Hikes (PATH) Act of 2015
On August 4, 2016, the Internal Revenue Service (IRS) issued Notice 2016-48, Implementation of PATH Act ITIN Provisions, explaining changes made to the Individual Taxpayer Identification Number (ITIN) program by the Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act") enacted on December 18, 2015.
On June 8, 2016, Michigan Governor Snyder (R) signed legislation repealing the flow-through entity withholding requirement. For tax years that begin on or after July 1, 2016, House Bill 5131 removes the statutory requirement that flow-through entities withhold tax at prescribed rates on the distributive share of taxable income of their individual nonresident members and the distributive share of business income of members that are corporations or other flow-through entities. Existing withholding requirements continue to be in effect for tax years beginning before July 1, 2016.
Nevada Commerce Tax Update
As an update to the June 25, 2015 Law Firm Services News Alert on the Nevada Commerce Tax, the Nevada Legislative Commission adopted regulations addressing the administration, calculation and payment of the Nevada Commerce Tax. This tax became effective July 1, 2015 and is imposed on businesses with Nevada gross revenue in excess of $4,000,000.
The Indian Legal Market is expected to open soon to foreign lawyers and law firms
India has taken steps to open its legal market to allow foreign lawyers and law firms to practice law in India. It is anticipated that 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 Indian law.
Louisiana Governor signs several bills into law affecting law firms operating in a corporate form
Following the adjournment of Louisiana’s second special session on June 23, 2016, Governor John Bel Edwards signed several bills into law and made other tax law changes that affect law firms that operate in a corporate form. Changes concerned market-based sourcing, single sales factor expansion, throwout and sales tax exemptions.
Canada's View of Certain LLPs May Simplify Canadian Tax Compliance But Cost Firms Additional Tax
Partnerships that "carry on business in Canada" are required to file Canadian partnership information returns related to their activities in Canada. If non-resident partners are entitled to an available treaty exemption on their allocable share of the Canadian source business income because the firm does not have a permanent establishment ("PE") in Canada, then only those non-resident partners that are corporations are required to file income tax returns because non-resident corporations that "carry on business in Canada" are required to file returns. If there is a PE in Canada, then all non-resident partners who are allocated a portion of the Canadian business profits are subject to individual or corporate income tax and must file Canadian returns. PwC has assisted several non-Canadian Law Firms in meeting these filing requirements.
North Carolina's Department of Revenue recently made several changes to regulations effective May 1, 2016
The North Carolina Department of Revenue recently made several changes to regulations, effective May 1, 2016, addressing the computation of taxable income for partnerships, and how that income flows through to partners. The changes primarily related to the reporting and treatment of interest income, depending on the source and character of the income.
Connecticut approves market sourcing for both corporate and personal income tax, single factor for personal income tax
On May 13, 2016, in a special session to finalize the state’s budget, the Connecticut Legislature approved legislation adopting market-based sourcing provisions under both the corporate and personal income tax laws, and a single receipts factor apportionment formula for personal income tax purposes. Governor Malloy is expected to sign this legislation.
Action needed on Short Term Business Visitors (STBVs)
All firms with visiting foreign employees need to have a short term business visitor (STBV) agreement in place, and ensure that the requirements of that agreement are met. As a reminder, Firms with agreements in place need to ensure that their annual report is completed and submitted to HMRC by May 31, 2016.
Law Firms and Indirect Taxes
This update from our PwC VAT colleagues captures the key VAT developments for Law Firms from across the PwC VAT Global Law Firm network. It also reports on the recent UK Supreme Court judgement in the Airtours VAT case.
New UK Disclosure Regulations Require Registration of "People with Significant Control" starting April 6, 2016
New disclosure rules coming into force on April 6, 2016 will require all UK incorporated companies and LLPs to maintain and disclose a register of ultimate ownership and control, known as a 'People with Significant Control' ("PSC") register. The new register is designed to ensure that individuals who ultimately own, control, or significantly influence the running of UK companies and LLPs are identified, along with personal information and details of their holdings or level of control. Personal information of PSC includes: Name; date of birth; service address; residential address; country/state of residence; nationality; date they became a PSC; and nature of control. Where there are layers of ownership, including foreign entities and trusts, these structures will be looked through in order to identify the individual or individuals who ultimately control or influence the UK entity. Even if no significant control is found to exist, this must be reported, as well.
Changes to Korea’s Tax Law May Affect Your Law Firm Operations in Korea
The Korean National Assembly has recently approved amendments to tax laws for 2016, some of which may impact foreign law firms operating in Korea. These changes include:
US Law Firms with Offices in Hong Kong - The Legal Practitioners Ordinance of 2012 becomes effective on March 1st…did you address the implications to your firm?
The Legal Practitioners ("Amendment") Ordinance 2012 ("Amendment Ordinance") will be effective starting March 1, 2016. The Amendment Ordinance, which was enacted in July 2012, introduces limited liability partnership ("LLP") for law firms operating in Hong Kong. A partner in a LLP permitted under the Amendment Ordinance will be protected against personal liability for the default of other members of the LLP arising from the provision of professional services, provided that certain conditions are satisfied.
Recent Changes in Japan's Tax Law Will Impact US Firms with Offices in Japan
Japan recently introduced new tax rules (the Authorized OECD Approach, or "AOA") concerning the taxation of business profits attributable to a permanent establishment of a foreign corporation or non-resident individual doing business in Japan. These rules will impact the non-resident partners in many foreign law firms with Japan branches. Under the AOA approach, business profits are calculated, in part, by recognizing internal dealings between a head office and its branches and by applying the arm's length principle between a branch and its head office. Further, under related transfer pricing documentation requirements, it will be necessary for foreign (i.e, non-Japanese, including U.S.) law firms to prepare the necessary transfer pricing documentation to reflect these internal dealings.
Canada's New Alternative Regime May Simplify Regulation 102 Compliance
Regulation 102 of the Canadian Income Tax Act provides that every employer (including non-residents) that pays salary or other remuneration to non-resident employees relating to employment duties performed in Canada (even for 1 day) is required to withhold Canadian income taxes in respect of such amounts unless an advance waiver is provided by the Canada Revenue Agency ("CRA"). Law firms that have historically tried to address these issues realize how much time and "red tape" is involved.
President Obama signs tax extender, government funding legislation
Late on December 18 (the date of enactment), President Obama signed into law legislation (H.R. 2029) that includes a $680 billion tax package and funding for the federal government through September 30, 2016. The legislation provides retroactive, permanent extension of the research credit and 21 other business and individual tax provisions, while more than 30 other expired provisions were renewed retroactively for either five or two years.
New Law Makes Significant Changes to Partnership Audit and Adjustment Procedures
The Bipartisan Budget Act of 2015 (the Budget Act), signed into law by President Obama on November 2, amends the Internal Revenue Code to make significant changes to partnership audit and adjustment procedures. In general, the Budget Act repeals current-law audit and adjustment procedures for partnerships (commonly referred to as TEFRA) and rules for electing large partnership (ELP) and replaces them with new audit and adjustment procedures that apply by default to all partnerships.
North Carolina enacts corporate income, corporate franchise, individual income, and sales tax changes
On September 18, 2015, North Carolina enacted its 2015 Appropriations Act, H.B. 97, which includes significant tax changes.
Preparing for BEPS Compliance - What Law Firms Need to Know
Historically, law firms have not focused extensively on transfer pricing -- cross border transactions among offices and branches were limited as profits were allocated to partners and reported according to their offices. Accordingly, the value of human capital for law firms has mitigated the transfer pricing issues associated with the proper reporting of income in the jurisdiction where the value is created, as compared to other industries in which profits may arise from intellectual property that is mobile by nature.
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.
IRS issues instructions for Form W-8BEN-E enabling foreign entities to comply with FATCA
On June 25, 2014, the Internal Revenue Service (IRS) released the instructions for Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). Form W-8BEN-E, which was issued without instructions in March 2014 (with a February 2014 revision date), is used by non-US entities to document their status as a payee under Chapter 4 and as a beneficial owner under Chapter 3 of the Internal Revenue Code (Code). In addition, Form W-8BEN-E is used by non-US entities to document their entitlement to a reduced rate of withholding pursuant to an income tax treaty. An entity that does not document its Chapter 4 status (commonly referred to as its FATCA status) may be treated as a recalcitrant account holder or nonparticipating foreign financial institution, and subject to a 30% withholding when receiving certain withholdable payments.
Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (FinCEN Form 114)
Effective July 1, 2013, all filers must file Foreign Bank and Financial Account Reports (“FBARs”) electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). FBAR Form 90-22.1 has been discontinued and is replaced by FinCEN Form 114.
Deadlines loom for San Francisco's new Gross Receipts tax
San Francisco voters in 2012 approved significant changes to the San Francisco business tax regime. The first tax filings affected by these changes will be the installment payments due April 30, 2014 and the registration/fees due May 31, 2014.
French tax audit new obligations for French law practices
The 2012 Amended Finance Bill provides that the presentation of computerized and other non-paper based accounting records in computerized format for the purposes of a tax audit becomes compulsory.
UK Releases Draft Legislation Addressing whether a UK LLP Partner is an Employee or Self Employed for UK Tax Purposes
Draft legislation was issued on December 10, 2013 concerning the tests which are to apply from April 6, 2014 to determine whether a member of a UK LLP should be regarded as employed or self-employed for UK tax purposes. If a member of a UK LLP meets three criteria set out in the legislation they will be regarded as an employee for UK tax purposes and potentially subject to payroll taxes and employers National Insurance at 13.8%.
UK Position on Short Term Business Visitors (STBVs)
HMRC’s approach to STBV arrangements has changed. It used to be the case that -- providing a double taxation treaty applied to protect an employee from income tax in the UK (and employers had appropriate systems in place to identify who qualified under the treaty) – no PAYE (Pay-As-You-Earn tax) penalties would be applied by the HMRC even if PAYE was not accounted for under the circumstances mentioned above.
Belgium VAT Exemption for Legal Services Ends January 1, 2014
The Belgian VAT exemption that is currently enjoyed by lawyers providing services in Belgium will end effective January 1, 2014. As a result, VAT must be applied to all fees and costs charged for lawyer services rendered as of January 1, 2014. To do so, all Belgian based law firms and all individual lawyers will need to register for VAT before year-end and set up an appropriate VAT accounting from 2014 and onwards.
Update on China's VAT - State Administration on Taxation Issues Long-Awaited Guidance on VAT Exemption for Export Services
China's State Administration of Taxation ("SAT") has released SAT Notice  No. 52 ("Notice 52") which provides implementation guidance on the VAT exemption for export services.
New rules proposed in South Korea for applying the flat income tax rate to foreign workers
Foreigners working in Korea can elect to have their employment income taxed at the flat tax rate of 18.7% (including resident surtax) rather than the normal progressive income tax rates. The 18.7% rate is currently available for all foreign expatriates and employees until at least December 31, 2014.
Illinois – Composite returns eliminated, non-resident withholding required, alternative apportionment updated
On August 16, 2013, Illinois Governor Pat Quinn signed H.B. 3157, which will eliminate composite returns effective for tax years ending on or after December 31, 2014. While the new legislation also requires partnerships, S-corporations, and trusts to withhold tax on "nonbusiness income" distributable to their respective non-resident partners, shareholders, and beneficiaries, this provision is not expected to apply to compensation paid by, or distributions from law firms.
Recent Changes in Pennsylvania's Tax Code May Affect Some Law Firms
A number of changes introduced recently by Governor Tom Corbett (H.B. 465) to Pennsylvania's tax code may affect U.S. law firms with offices and/or clients in Pennsylvania.
India Drops Requirement that Tax Residency Certificate Contain Certain Information; Introduces New Form 10F to be Provided by Nonresident Payees Claiming Benefits Under a Treaty
In the Finance Act, 2013, India has amended Section 90(4) by omitting the requirement that a tax residency certificate must contain certain information in order to be valid for purposes of claiming the benefits of a tax treaty. Instead, new Form 10F may be submitted by a nonresident to an Indian payor when claiming Treaty benefits.
Recent China Regulations Tighten Restrictions on Visa Issuance
The Legislative Affairs Office of the State Council recently released regulations pursuant to the new Exit-Entry Administration Law, which became effective July 1, 2013. The law was intended in part to curtail illegal residency and employment in China. As of September 1, 2013, the new regulations introduce various new visa types and clarify the administrative procedures and required supporting documentation.
Massachusetts Enacts Market Sourcing and Sales Tax on Computer Services
Effective for tax years beginning on or after January 1, 2014, H.B. 3535 sources sales, other than sales of tangible personal property, to Massachusetts if the taxpayer’s ‘market for the sale’ is in the state. With respect to determining a taxpayer’s market, the legislation provides that a market is considered to be in Massachusetts if and to the extent the services are ‘delivered’ to a location in the state.
Cook County Use Tax is No Longer In Force -- Law Firms with Offices in Chicago Should No Longer Remit This Tax, Pending Outcome of Litigation
On July 24th, a judge of the Circuit Court of Cook County issued an injunction enjoining enforcement of the Cook County use tax. By granting the plaintiff's motion for a preliminary injunction, the court has effectively ruled that the tax is no longer in force. The plaintiffs, including several law firms, argued that the ordinance violates an Illinois statute, as well as the Illinois and U.S. Constitutions. Judge Robert Lopez Cepero agreed, finding that the tax violated the Illinois Counties Code, the Illinois Constitution's prohibition against imposition of an ad valorem tax on personal property, and the U.S. Constitution's commerce clause.
Patient-Centered Outcomes Research Institute (PCORI) Fee is due July 31, 2013
The Affordable Care Act (Public Law 111-148, amended by Public Law 111-152) imposes certain fees on employers. The Patient-Centered Outcomes Research Institute Fee (PCORI), due July 31st of each calendar year, is a fee to fund the research institute for medical research. Each individual employee and their dependents covered under the health insurance and self insured health plans or policies during the year will be used in computing the fee.
New York Appellate Court Overturns Decision Striking Down Metropolitan Transportation Authority Payroll Tax
On June 26, 2013, the Supreme Court, Appellate Division, overturned a 2012 decision that held the state’s Metropolitan Transportation Authority (MTA) payroll mobility tax violated home-rule provisions contained in the State’s Constitution (Mangano et al., v. Silver, et al., New York Supreme Court, Appellate Division, 2013 NY Slip Op 04783, June 26, 2013).
Belgium to End Exemption from VAT for Certain Lawyers' Fees
On 30 June 2013, the Belgian government reached an agreement on the 2013-2014 federal budget, including the decision to abolish the Belgian VAT exemption for lawyers (VAT exemption without input VAT credit). Hence, as from 1st January 2014, all lawyers' fees will become subject to 21% VAT in Belgium.
Pennsylvania to End Personal Income Tax Credit for Taxes Paid to Foreign Countries
On July 9, 2013, Pennsylvania Governor Tom Corbett signed H.B. 465, which makes significant changes to Pennsylvania taxes, including the elimination of the personal income tax credit for taxes paid to foreign countries. The credit allowed for taxes paid to other US states will remain in effect. This change will be effective for tax years beginning after December 31, 2013.
India Appellate Tribunal Holds Professional Services Income Taxable Only as to Services Performed in India
On May 13, 2013, a Special Bench of the Income Tax Appellate Tribunal sitting in Mumbai issued an Order in favor of an assessee U.K. law firm, holding that the income of the non-resident law firm related to India would be taxable only to the extent attributable to services performed in India. Secondly, the Special Bench determined that, in interpreting Article 7(1) of the India-U.K. Tax Treaty as it relates to businesses with a permanent establishment in India, consideration attributable to services rendered in the resident State (U.K.) is not taxable in the source State (India).
UK HMRC Issues Guidance on Partnership Abuse Items of Concern
As announced in the 2013 UK Budget, HMRC released a consultation document on 20 May in relation to a review of two aspects of the partnership taxation rules in the UK: the removal of the presumption of self-employment for partners in limited liability partnerships (LLPs); and countering the artificial allocation of profits or losses to partners in LLPs and other partnerships (including using a company, trust or similar vehicle) to secure tax advantages.
Expanded German Insurance Premium Tax liability for international law firms with insured operations in Germany
International law firms often conclude umbrella insurance contracts, also known as master policies. These policies cover either all or the main insured risks cases of their permanent establishments (PE) or subsidiaries around the world, including Germany. In this context the risk of taxability of the paid premiums has increased due to the amendments of the German Insurance Premium Tax Act (VersStG) which came into effect on 1 January 2013.
Law Firms and Indirect Taxes from a German VAT Point of View
This information covers – from a German VAT point of view - some of the key developments and current issues affecting law firms in indirect taxes, in particular with regard to the EU changes to VAT invoicing rules meant to be taking effect from January 2013.
House Ways & Means Committee Issues Technical Explanation on Tax Reform with respect to Pass Through Entities
On March 12, 2013, the House Ways and Means Committee issued a "small business" tax reform discussion draft featuring proposals affecting large and small partnerships, and S corporations.
India and Ministry Certification Rules
The India Ministry of Finance, in September 2012, issued new rules regarding residence certifications for purposes of claiming benefits under double tax treaties. These new rules have caused a dramatic increase in the number of clients requiring withholding as IRS Form 6166 does not meet the new requirements.
Update on the classification of foreign legal consultant office in Korea
With the recent opening of the legal market in Korea in 2012, several US and UK law firms have established Korean offices. Since many of these law firms are structured as limited liability partnerships (LLP) in various jurisdictions, and with Korea having no comparable entity structure, there was no clear guidance as to how to treat these Korean offices for local tax purposes.
Maryland's failure to provide a tax credit for local portion of personal income tax for out-of-state income is ruled unconstitutional
Maryland imposed a personal income tax on all of the income of a Maryland resident, regardless of whether that income is earned within the state or outside the state. The personal income tax includes a 'state income tax' and a 'county income tax'.
Tax Court Reaffirms Principle that Law Firms Cannot Deduct Contingent Case Advanced Expenses Until Case is Closed
On January 17, 2013, the United States Tax Court (“Tax Court”) issued a Memorandum Opinion in Humphrey, Farrington & McClain, P.C. v. Commissioner, T.C.Memo. 2013-23, concerning the proper treatment of advanced expenses incurred by a law firm with respect to contingent fee cases. The Internal Revenue Service (“IRS”), as well as numerous court rulings, have consistently held that such expenses are not immediately deductible and must be treated as loans, even if the eventual recovery of the advances is contingent.
French Constitutional Court Strikes Down Application of 75% Surtax to Income Earned in 2012, and 14.5% Social Security Tax Applicable to Foreign Source Income covered by an Income Tax Treaty
French Constitutional Court struck down the 75% tax provision of the Finance Act with respect to 2012 income. However, the grounds for invalidating the provision were very narrow and the government has announced its intention to draft new legislation in the future taxing high income earners.This alert shares insight around the impact to law firms.
Recent U.S. Tax Law changes create new top tax bracket and extend certain business tax incentives impacting law firms
President Barack Obama on January 2 signed into law H.R. 8, the "American Taxpayer Relief Act of 2012," which includes permanent extensions of certain 2001 and 2003 tax provisions for individuals with incomes below $400,000, and joint filers with incomes below $450,000. This alert shares insight around the new top tax bracket and incentives impacting law firms.
PwC Law Firm Services News Alert - New York State Provides Extension Through 11/14 for Employers Affected by Hurricane Sandy to File Protective Claims in connection with the Metropolitan Transportation Authority Payroll Tax
The New York State Department of Taxation and Finance has granted an extension of time to employers to file protective claims with respect to the Metropolitan Transportation Authority Payroll Tax.
PwC Law Firm Services News Alert – New York State Provides Guidance and Procedures for Filing Protective Claims in connection with NY Court Decision Striking Down the Metropolitan Transportation Authority Payroll Tax
The New York State Department of Taxation and Finance has posted information on its website containing instructions for taxpayers that wish to file protective claims with respect to the Metropolitan Transportation Authority Payroll Tax.
PwC Law Firm Services News Alert - France's Proposed Social Security Financing Law for 2013 Eliminates Cap on Health Insurance Contributions
The draft bill of the French Social Security Financing Law for 2013 includes, specific measures regarding social contributions due by self-employed individuals, such as law firm partners.
PwC Law Firm Services News Alert – France's Proposed Finance Bill Includes a 45% Income Tax Rate and an Exceptional Surtax of 75% on Very High Earned Income
In its proposed finance bill announced September 28th, the French government has recommended a number of changes to the tax code that would affect law firm partners and employees. As explained in the attached Tax Alert from our colleagues at Landwell, a new 45% income tax rate would be added to the code to apply to income earned on or after January 1st, 2012, in excess of Euro 150,000. Moreover, a 75% surtax would be applied on all income in excess of Euro $1 million per earner. This surtax is deemed temporary and, if enacted, would only apply to the 2012 and 2013 tax years only.
PwC Law Firm Services News Alert - Follow-up on Questions About Filing Protective Claims for Refund Following NY Court Decision Striking Down the Metropolitan Commuter Transportation Mobility Tax
As reported by PwC Law Firm Services in our August 30, 2012 news alert, a New York court has struck down the Metropolitan Transportation Authority Payroll Tax. A number of law firm clients have contacted PwC's Law Firm Services group about this alert, presenting questions and some rumors that have been circulating. At this time, we would like to provide several follow-up points.
PwC Law Firm Services News Alert - NY Court Strikes Down Metropolitan Transportation Authority Payroll Tax
The 10th District of the New York State Supreme Court, located in Nassau County east of New York City, struck down the state’s Metropolitan Transportation Authority payroll mobility tax on the basis that it violated home-rule provisions contained in the state’s Constitution.
PwC Law Firm Services News Alert - Singapore Enacts Measures to Attract Foreign Law Firms to Obtain Qualifying Foreign Law Practice Licenses
The Singaporean government has introduced several measures in recent years to liberalize its legal industry, providing significant tax and profit incentives to attract foreign law firms applying for Qualifying Foreign Law Practice (QFLP) licenses, effective immediately through August 31, 2012. To date, six foreign law practices were issued the QFLP licenses during the first round of applications in December 2008.
PwC News Alert - IRS ITIN Processing Revision may impact Foreign Partners of Law Firms that file in the US
The Internal Revenue Service has revised its procedures for processing Individual Taxpayer Identification Numbers ("ITINs"). These revisions are expected to result in an increased administrative burden on law firm foreign partners that apply to receive an ITIN.
PwC Law Firm Services News Alert - French Supreme Court Decision on French State Health Insurance Contributions May Impact French partners of US and UK Law Firms with Non-French Source Income
A recent French Supreme Court ("FSC") decision may have a costly impact on the French resident partners of US and UK law firms that receive foreign source income.
PwC Law Firm Services Alert - China May Extend VAT Pilot Program for Certain Law Firms with Offices in Beijing
As first reported in an earlier PwC Law Firms Services' News Alert, China has introduced a VAT Pilot Program in Shanghai. Several US and UK law firms with offices in Shanghai were invited to participate in the Pilot Program, which replaces the 5% Business Tax with a 6% VAT. To review the Shanghai Pilot Program, which details the potential impacts of participation in the VAT Pilot Program, please click here. Beijing tax authorities appear to be seeking permission from China's Ministry of Finance ("MOF") and State Administration of Taxation ("SAT") to join this Pilot Program. If permission is granted, law firms with offices in Beijing may be approached to join the Pilot Program with an unofficial date of July 1, 2012, being circulated for Beijing to join the Pilot Program.
PwC Law Firm Services News Flash - IRS Issues Revenue Procedure 2012-17 Regarding Electronic
On February 13, 2012, the Internal Revenue Service issued Revenue Procedure 2012-17, which provides that partnerships may furnish their partners with an electronic copy of their Schedule K-1 if the partner has affirmatively consented to receive the K-1 in electronic format, such as in pdf form in an email.
PwC Law Firm Services News Flash -- Insight for Firms Investigating the Opening of an Office in South Korea
The Korean Supreme Court on January 27 issued its ruling on the applicable Korean tax treatment of a U.S. Limited Partnership. This ruling provides much-needed clarification when considering the best entity for holding a Korean office.
PwC Law Firm Services Alert on China - China Introduces a VAT Pilot Program for Certain Law Firms in Shanghai
China has introduced a Pilot Program that would replace the business tax with a VAT system for selected industries. Certain US law firms with operations in Shanghai have been approached to participate in the Pilot Program, and more may be approached in the future. This LFS Alert addresses the important facts about the Pilot Program that every firm with operations in China should know, and potential impact upon your firm.
PwC Law Firm Services News Alert on the Russian Court tax ruling that potentially impacts US and UK Firms
This recent Russian court case has resulted in firms reexamining their engagement procedures and may greatly impact PwC law firm clients with branches in Russia. The case addresses how foreign companies operating in Russia through a permanent establishment (“PE”) should determine taxable income and deductible expenses.
PwC Law Firm Services News Alert for Law Firms with Attorneys in China - September 2011
China has issued formal guidance on its new Social Security Law. Contributions will be required of U.S. law firms and their attorneys practicing in China beginning October 15, 2011.
In the effort to create a more uniform social insurance scheme in China, the Ministry of Human Resources and Social Security has issued detailed guidance on implementing the new social security scheme. Several provisions will have a profound impact on US law firms that practice in China.
PwC Law Firm Services News Alert on the UK's residency law reform and remittance regime - September 2011
The UK Government has announced several important tax-related proposals to take effect in early 2012, including reform of the UK's residency law and expansion of the remittance regime. This memo provides helpful information for any US law firm with UK resident partners or any relocated non-UK partners making their way to Great Britain.
News Alert for International Law Firms with Offices in Germany - August 2011
Changes in who may hold equity in a UK law firm (i.e., non-lawyers), and challenges in the US on the same issue, will impact whether the German trade tax applies to a firm's operations in Germany. Normally, an international law firm's German source income is exempt from the trade tax. However, as our colleagues at PwC Germany explore in their memorandum, unwary firms may inadvertently become subject to this tax.
LiFTS Email on the IRS "Attorneys Audit Technique Guide" manual - August 2011
The manual gives insight into what the IRS is looking for when reviewing an attorney's returns. It addresses, among other things, the use of personal service corporations by attorneys. It also outlines a variety of expenses common to attorneys, with recommendations for document requests, the types of files to review, and other key areas. It also details the types of forms that attorneys should be filing (1099s, FBAR, etc) and the databases available to IRS professionals for checking on such compliance.
New Tax Treaty Guidance Issued by China Provides Insight on US-China Tax Treaty Language Applicable to the Establishment of a Service Permanent Establishment in China - July 2011
The China State Administration of Taxation recently issued Circular 75, which contains guidance on what activities constitute a service permanent establishment. This guidance is especially noteworthy for US law firms providing services to clients in China since it may be applied by local-level tax bureaus in China to determine whether a service permanent establishment has been created under the China-US Tax Treaty.
Japan News Alert
Japan has announced the proposed deregulation of its Practicing Attorney Law to allow foreign law firms to operate in Japan through a Legal Professional Corporation ("LPC"). In the attached memo, our colleagues at PwC Japan have outlined the primary advantages and disadvantages associated with a foreign law firm operating in Japan as a partnership and as an LPC.
India imposes requirement to obtain a Permanent Account Number
Effective April 1, 2010, every non-resident that receives income from India is required to obtain a Permanent Account Number ("PAN") from the Indian Income Tax Authorities and provide it to the Indian payor.
Setback for foreign law firms hoping to establish operations in India
The Bombay High Court has ruled that the practice of law in India by US and UK law firms is not allowed unless foreign lawyers abide by the Advocates Act that governs the practice of the profession of law in India.
Governor Paterson announces proposed changes to MTA mobility tax
Law firm partnerships with offices in New York City face higher proposed rate of tax.
Advice on paying the China Business Tax for US multinational law firms with clients in the People's Republic of China
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 countriesl have new monthly VAT reporting obligations. Failure to comply with these monthly reporting obligations can result in severe penalties being imposed.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.