Daily Tax update - June 22, 2007

IRS ISSUES PROPOSED AND TEMPORARY REGULATIONS RELATING TO INCOME EXCLUSION FOR FOREIGN CORPORATIONS UNDER SECTION 883:  Today, Treasury and the IRS issued proposed and temporary regulations that revise existing final regulations under section 883.  Under section 883(a), income earned by a foreign corporation from the international operation of ships and aircraft is generally excluded from gross income and exempt from U.S. taxation if the foreign country in which the corporation is organized grants an equivalent exemption to U.S. corporations.  Section 883(c)(1) provides that a foreign corporation will not qualify for the income exclusion unless 50 percent or more of its stock is owned by residents of a country that grants an equivalent exemption to U.S. corporations.  Section 883(c)(2) provides that controlled foreign corporations (CFCs) are not subject to the stock ownership requirement of section 883(c)(1).  Final regulations issued in 2003 generally provide that a CFC is eligible for the income exclusion only if 50 percent or more of its Subpart F income derived from the international operation of ships and aircraft is includible in the gross income of U.S. persons.

  • The proposed and temporary regulations address the eligibility of CFCs for the income exclusion of section 883(a) in light of the repeal of the foreign base company shipping provisions by the American Jobs Creation Act of 2004.  Notice 2006-43 provides guidance as to the eligibility of CFCs for the income exclusion after the repeal of the foreign base company shipping provisions.  The proposed and temporary regulations adopt the standard set forth in Notice 2006-43 with modifications.  The proposed and temporary regulations provide that foreign corporations are eligible for the income exclusion if (i) the foreign corporation was a CFC for more than half the days of its taxable year and (ii) more than 50 percent of the total value of its outstanding stock was owned by U.S. persons for more than half the days of the foreign corporation's taxable year, provided that such days overlap with the days in which the foreign corporation qualifies as a CFC.
  • The proposed and temporary regulations clarify that certain ground services will be treated as incidental to the international operation of ships or aircraft, whether provided to another enterprise as part of a pooling arrangement, alliance, or other joint venture.
  • The proposed and temporary regulations also provide additional guidance under section 883(a) and (c), including the eligibility for the income exclusion for foreign corporations organized in countries providing an exemption for certain shipping and air transport solely by reason of an income tax convention, and the application of certain reporting requirements under the final regulations.
  • The proposed and temporary regulations are generally effective June 25, 2007.
  • Rev. Rul. 2001-48, 2001-2 C.B. 324, sets out a list of countries that grant equivalent exemptions to U.S. corporations under an exchange of notes, pursuant to domestic law, or by reason of an income tax convention.
  • For additional information, contact Stanley Smilack  - ssmilack@steptoe.com or Philip R. West - pwest@steptoe.com 
  • The regulations can be accessed via:

EC VAT AND SERVICES PROVIDED BY A FINANCIAL INTERMEDIARY:  The European Court of Justice (“ECJ”), in a case referred to it by a German court (click here), determined that self-employed financial advisers who located and interviewed potential clients for lending institutions could be engaged in the VAT-exempt negotiation of credit.

TRANSFER PRICING DOCUMENTATION DEADLINE ON SEPTEMBER 15, 2007 FOR CALENDAR YEAR TAXPAYERS:  To avoid penalties, taxpayers should include appropriate documentation of their transfer pricing methodologies and results with their tax returns.  For calendar year taxpayers, this means that the documentation must be completed by September 15.  IRS agents have been instructed to look critically at this documentation, so companies may want to reconsider the standards they have used in the past for determining whether their documentation is rigorous and specific enough.  Steptoe's transfer pricing group is available and particularly well-situated to assist with that work.  Click here for more information. 

TAX BILLS INTRODUCED JUNE 21TH:
H.R. 2810: To amend the Internal Revenue Code of 1986 to provide a credit against income tax for biomethane produced from biomass which is equivalent to the credit allowed for electricity produced from biomass.
Sponsor: Rep. Jefferson, William J. [LA-2] (introduced 6/21/2007)      Cosponsors (3)

H.R. 2816: To amend the Internal Revenue Code of 1986 to modify the application of the tonnage tax on vessels operating in the dual United States domestic and foreign trades, and for other purposes.
Sponsor: Rep. Meek, Kendrick B. [FL-17] (introduced 6/21/2007)      Cosponsors (3)

H.R. 2823: To amend the Internal Revenue Code of 1986 to deny any deduction for direct-to-consumer advertisements of prescription drugs that fail to provide certain information or to present information in a balanced manner, to amend the Federal Food, Drug, and Cosmetic Act to require reports regarding such advertisements, and to amend such Code to deny any deduction for direct-to-consumer advertisements of qualified prescription drugs for a two-year period.
Sponsor: Rep. Stark, Fortney Pete [CA-13] (introduced 6/21/2007)      Cosponsors (None)

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
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