Daily Tax Update - November 28, 2007

TREASURY ISSUES REPORT ON INTERNATIONAL TAX ISSUES:  Today, the Treasury Department sent to Congress a Congressionally mandated report on three international tax issues. The “Report to the Congress on Earnings Stripping, Transfer Pricing and US Income Tax Treaties” describes current issues regarding US earnings stripping rules, transfer pricing rules, and the misuse of income tax treaties to which the United States is a party. The report provides conclusions and recommendations in each of the three areas studied.

• According to Treasury’s press release, “The study did not find conclusive evidence of earnings stripping by foreign-controlled domestic corporations that had not inverted. More information is needed to reach a definitive conclusion on that issue. In order to obtain this additional information and to further the administration of the current earnings stripping rules, the study recommends that the relevant tax forms be modified to require more information about earnings stripping. The IRS released a new proposed form today.” The proposed form requires corporate taxpayers that either paid or accrued any disqualified interest for the tax year or carried forward disallowed disqualified interest from prior tax years under section 163(j) to provide some information on the determinations and computations under section 163(j).
• The draft form can be accessed via: http://www.irs.gov/pub/irs-dft/f8926--dft.pdf
• On the issue of transfer pricing rules, the report said, “The study indicates that the transfer pricing rules must be continually monitored to ensure their relevance to changing business conditions and to prevent income shifting from non-arm’s length transfer pricing. The study recommends that the Treasury Department modernize and finalize three sets of transfer-pricing guidance.  More specifically, the study recommends:
  • Cost Sharing: Revision of the existing guidance on contributions for which arm’s length consideration (“buy-in” payments) must be provided as a condition to entering into a cost sharing arrangement;
  • Services:  Completion of the related-party services regulations to reflect legal, business and economic developments since the regulations were issued in 1968; and
  • Global Dealing:  Completion of new rules to allow taxpayers to determine the amount of income from a global dealing operation that is subject to tax in the United States, as well as the source of such income and the circumstances under which such income is effectively connected with a US trade or business.”
• The release continued, “The study on US income tax treaties focuses on the need to prevent third-country residents from inappropriately obtaining the benefits of US income tax treaties, in particular by achieving inappropriate reductions in US withholding taxes.  The study notes that in recent years interest payments have surged from foreign-controlled US corporations to related parties in countries that are a party to a US tax treaty with no “limitation on benefits” (LOB) provisions and that provides significant reductions in withholding rates.  Such exploitation of those treaties without anti-treaty shopping protections confirms (1) the LOB provisions in other US agreements appear to provide significant deterrence against abuse, and (2) the Treasury Department must continue its ongoing efforts to revise treaties with no or inadequate LOB provisions.”
• The report can be accessed via: http://www.treas.gov/offices/tax-policy/library/ajca2007.pdf  

DECEMBER TAX TALK TODAY WILL FOCUS ON TAX FILING SEASON:  The IRS announced that December’s Tax Talk Today program is titled, “Getting Ready for the Filing Season 2008: Part 1 (Individuals).” The program will be held on Tuesday, December 11, 2007 at 2 p.m. According to the IRS, “Tax Talk Today is a Webcast aimed at educating tax and payroll professionals on the most current and complex tax issues.” The January 8, 2008, webcast will address business-related returns.

• Additional information can be accessed via: http://www.taxtalktoday.tv/

The November edition of Steptoe & Johnson's UK Tax Law Update can be accessed via: http://www.steptoe.com/attachment.html/3243.pdf

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

• Learn more about the members of the tax practice group.