721.8 kB - Poledna | Boss | Kurer
721.8 kB - Poledna | Boss | Kurer 721.8 kB - Poledna | Boss | Kurer
Code Sec. 482 gives the IRS the authority to reallocateincome and expense among related partiesif necessary to clearly reflect the income of ataxpayer. For example, if a loan made by a foreignparent company to a domestic corporation providesfor an unreasonably high rate of interest,the IRS may adjust the U.S. subsidiary's interestexpense deductions to reflect an arm's-lengthrate of interest for a comparable loan made undercomparable circumstances. 6 Likewise, the IRSmay adjust the royalty charged on a cross-borderlicensing agreement if it does not provide an arms-length result, and the regulations under CodeSec. 482 provide various methods for determiningan arm's-length royalty rate. 7 Income taxtreaties also generally contain an associated enterprisesprovision, which permits the IRS to adjustthe income derived by related parties if theircommercial or financial relations (e.g., interest orroyalty rates) differ from those that would existbetween unrelated persons. 8Code Sec. 267(a)(2) generally prohibits an accrualbasis taxpayer from deducting interest expenses orroyalty expenses accrued but not yet paid to a relatedperson that is a cash basis taxpayer. Instead, theexpense is deductible in the tax year that the correspondingincome is recognized by the related payee.This provision is based on the principle that the incomeand expense arising from related party transactionsshould be recognized in the same tax year. In thecase of interest and royalties owed to related foreignpersons, no deduction is allowed until the expense ispaid, regardless of the related foreign payee s methodof accounting. 9 For this purpose, a related foreignperson includes, but is not limited to, a foreign personthat is a more than 50-percent shareholder of thedomestic corporation making the interest payment,as well as other members of a controlled group thatincludes the more than 50-percent shareholder. 10Congress enacted Code Sec. 163(j) to limit thetax benefits that a foreign parent corporation obtainsfrom using debt as opposed to equity to financeits U.S. subsidiaries. Code Sec. 163(j) disallowsa deduction for interest expenses that arepaid to a related person and the correspondinginterest income is exempt from U.S. tax, as wellas interest expenses paid to an unrelated personif the debt is guaranteed by a related foreign personand no U.S. withholding tax is imposed onthe unrelated payee's interest income. 11 For thispurpose, a related person includes a more than50-percent shareholder, as well as other membersof a controlled group that includes the more than50-percent shareholder. 12 A domestic corporation'sinterest expense deductions are disallowedonly if the corporation has excess interest expenseand its debt-to-equity ratio exceeds 1.5 to one. 13The amount of disallowed interest expense deductionsmay not exceed the corporation s excessinterest expense for the tax year. 14 Excess interestexpense equals the excess, if any, of the corporation'snet interest expense over 50 percent of itsadjusted taxable income. 15 Any disallowed interestexpense deductions may be carried forwardindefinitely and treated as interest expenses paidin a carryforward year. 1636
State Interest And IntangibleExpenses Addback ProvisionsAlthough most states use federal taxable incomeas the starting point in computing a domestic corporations state taxable income, each state requiresvarious addition and subtraction modifications. 17These adjustments reflect differences in federal andstate policy objectives, as well as fiscal constraints.For example, due to budgetary constraints, manystates do not conform to federal bonus depreciationor the Code Sec. 199 deduction.As indicated in Table 1, 20 states and the Districtof Columbia require domestic corporationsto add back otherwise deductible related party interestexpenses and intangible expenses (royalties,licensing fees, etc.) in computing state taxable income.States have enacted these provisions to limitthe ability of taxpayers to erode the corporateincome tax base through the use of intercompanyfinancing and licensing arrangements which giverise to deductions for interest expenses and intangibleexpenses. The different state addback provisionsshare many common themes. Nonetheless,there are significant differences among the stateswith respect to the specific types of expenses andrelated entities targeted by the addback provisions,as well as the circumstances under which anexception applies and the related-party expense isdeductible for state tax purposes. Therefore, it isessential to thoroughly analyze each state's specificprovisions to ensure compliance.Expenses TargetedState-related party expense addback provisions aregenerally targeted at two types of expenses – interestexpenses and intangible expenses (see Table 1).States generally define "interest expense" by referenceto Code Sec. 163 . For example, for purposes ofthe Maryland addback provision, interest expensemeans "an amount directly or indirectly allowedas a deduction under Section 163 " for purposes ofdetermining federal taxable income. 18 Some statesdisallow interest expense deductions only if theinterest expense is related to intangible property.Such provisions are aimed at tax planning structureswhere an operating company pays a royaltyfor the use of an intangible asset to a related party,and the related party then lends the funds back tothe operating company. For example, the Indianaaddback provision applies to "directly related intangibleinterest expenses," 19 which means interestpaid on loans where "the funds loaned were originallyreceived by the recipient from the payment ofintangible expenses" by the taxpayer or a memberof the same affiliated group as the taxpayer. 20 In asimilar fashion, the New York addback requirementapplies only to "royalty payments," which includespayments for the use of intangible property, as wellas "amounts allowable as interest deductions under[ Code Sec. 163 ] to the extent such amounts are directlyor indirectly for, related to or in connectionwith the acquisition, use, maintenance or management,ownership, sale, exchange or disposition ofsuch intangible assets." 2137
- Page 1 and 2: GLOBAL TAX WEEKLYa closer lookISSUE
- Page 3 and 4: GLOBAL TAX WEEKLYa closer lookISSUE
- Page 5 and 6: FEATURED ARTICLESISSUE 30 | JUNE 6,
- Page 7 and 8: taxation treaties concluded by Swit
- Page 9 and 10: FEATURED ARTICLESISSUE 30 | JUNE 6,
- Page 11 and 12: FEATURED ARTICLESISSUE 30 | JUNE 6,
- Page 13 and 14: UK, its offshore dependencies, and
- Page 15 and 16: financing and all forms of financia
- Page 17 and 18: Th e Government pointed out in part
- Page 19 and 20: Talks are now underway. The TIEA wi
- Page 21 and 22: through which they can clamber in o
- Page 23 and 24: fi nally, and most egregiously, the
- Page 25 and 26: office space, or own tangible asset
- Page 27 and 28: extended for 2 years in December 20
- Page 29 and 30: Financial transactions ( e.g. inter
- Page 31 and 32: OECD Section E - Redraft On Safe Ha
- Page 33 and 34: suggests that the following items m
- Page 35: FEATURED ARTICLESISSUE 30 | JUNE 6,
- Page 39 and 40: States generally define "intangible
- Page 41 and 42: Code Sec. 1563(controlledgroup)Stat
- Page 43 and 44: ConnecticutGeorgiaIllinoisIndianaRe
- Page 45 and 46: Rhode IslandTennesseeVirginiaWest V
- Page 47 and 48: Table 4. Comprehensive Income Tax T
- Page 49 and 50: include federal interest income, st
- Page 51 and 52: Recurring IssuesRestructuring of th
- Page 53 and 54: M&A. Nick has extensive experience
- Page 55 and 56: and consumers." As Germany and Chin
- Page 57 and 58: on many levels. The panel found tha
- Page 59 and 60: equirements placed on the states, i
- Page 61 and 62: NEWS ROUND-UP: COUNTRY FOCUS - ITAL
- Page 63 and 64: NEWS ROUND-UP: REAL ESTATE AND PROP
- Page 65 and 66: ates - such that, in 2014, the 4 pe
- Page 67 and 68: NEWS ROUND-UP: FTTISSUE 30 | JUNE 6
- Page 69 and 70: NEWS ROUND-UP: ENVIRONMENTAL TAXESI
- Page 71 and 72: Finally, the Federal Council veheme
- Page 73 and 74: Singapore Plugs Benefits For SMEsOf
- Page 75 and 76: TAX TREATY ROUND-UPISSUE 30 | JUNE
- Page 77 and 78: CONFERENCE CALENDARISSUE 30 | JUNE
- Page 79 and 80: Key speakers: John Capasso (Alvarez
- Page 81 and 82: Key speakers: TBA6/27/2013 - 6/27/2
- Page 83 and 84: 6/14/2013 - 6/14/2013http://www.con
- Page 85 and 86: THE CYPRUS BAIL-OUT ANDFOREIGN CLIE
State Interest And IntangibleExpenses Addback ProvisionsAlthough most states use federal taxable incomeas the starting point in computing a domestic corporations state taxable income, each state requiresvarious addition and subtraction modifications. 17These adjustments reflect differences in federal andstate policy objectives, as well as fiscal constraints.For example, due to budgetary constraints, manystates do not conform to federal bonus depreciationor the Code Sec. 199 deduction.As indicated in Table 1, 20 states and the Districtof Columbia require domestic corporationsto add back otherwise deductible related party interestexpenses and intangible expenses (royalties,licensing fees, etc.) in computing state taxable income.States have enacted these provisions to limitthe ability of taxpayers to erode the corporateincome tax base through the use of intercompanyfinancing and licensing arrangements which giverise to deductions for interest expenses and intangibleexpenses. The different state addback provisionsshare many common themes. Nonetheless,there are significant differences among the stateswith respect to the specific types of expenses andrelated entities targeted by the addback provisions,as well as the circumstances under which anexception applies and the related-party expense isdeductible for state tax purposes. Therefore, it isessential to thoroughly analyze each state's specificprovisions to ensure compliance.Expenses TargetedState-related party expense addback provisions aregenerally targeted at two types of expenses – interestexpenses and intangible expenses (see Table 1).States generally define "interest expense" by referenceto Code Sec. 163 . For example, for purposes ofthe Maryland addback provision, interest expensemeans "an amount directly or indirectly allowedas a deduction under Section 163 " for purposes ofdetermining federal taxable income. 18 Some statesdisallow interest expense deductions only if theinterest expense is related to intangible property.Such provisions are aimed at tax planning structureswhere an operating company pays a royaltyfor the use of an intangible asset to a related party,and the related party then lends the funds back tothe operating company. For example, the Indianaaddback provision applies to "directly related intangibleinterest expenses," 19 which means interestpaid on loans where "the funds loaned were originallyreceived by the recipient from the payment ofintangible expenses" by the taxpayer or a memberof the same affiliated group as the taxpayer. 20 In asimilar fashion, the New York addback requirementapplies only to "royalty payments," which includespayments for the use of intangible property, as wellas "amounts allowable as interest deductions under[ Code Sec. 163 ] to the extent such amounts are directlyor indirectly for, related to or in connectionwith the acquisition, use, maintenance or management,ownership, sale, exchange or disposition ofsuch intangible assets." 2137
Change language