Daily Tax Update - July 9, 2007

FINANCE PANEL TO EXAMINE CARRIED INTEREST:  On July 11, the Senate Finance Committee will hold a hearing on carried interest.  The hearing will examine the question of whether this income is capital gains income or regular personal income under the federal tax code.  An additional hearing to be held before the August recess will continue to examine the carried interest issue.  Eric Solomon, Assistant Secretary for Tax Policy at the Treasury Department, will describe the history of taxation of carried interest and Congressional Budget Office Director Peter Orszag will explain the underlying economics of carried interest.

EC LAW – COMMON SYSTEM OF TAXATION APPLICABLE TO EXCHANGE OF SHARES:  On July 5th, the European Court of Justice published its decision in Hans Markus Kofoed v Skatteministeriet.  This case dealt with the exchange of shares in a company based in Denmark in return for the issue of shares in a company based in Ireland which was subsequently followed by a declaration of dividend by the Danish company to the Irish company.  The Danish tax authorities argued that the dividend should be regarded as a cash payment made as part of the exchange of shares the value of which exceeded the maximum permitted under the EC Directive 90/434 and should therefore be taxable.  The European Court of Justice disagreed and held that, in principle, such a dividend should not be included in the calculation of the cash payment under the applicable Directive.  However that can be overridden if there is a tax avoidance motive or national rules on the abuse of rights provide otherwise.

TRANSFER PRICING DOCUMENTATION DEADLINE ON SEPTEMBER 15, 2007 FOR CALENDAR YEAR TAXPAYERS:  To avoid penalties, taxpayers should have appropriate documentation of their transfer pricing methodologies and results by the time they file 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

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.

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