Daily Tax Update - January 13, 2009

BERNANKE: “STRONG MEASURES” NEEDED TO STABILIZE ECONOMY:  Today, in a speech to the London School of Economics, Federal Reserve Board Chairman Ben Bernanke said that a stimulus package alone would not be enough to “promote a lasting US economic recovery” and further “strong measures” were needed to “stabilize and strengthen” the economy. 

  • Bernanke said, “The global economy will recover, but the timing and strength of the recovery are highly uncertain. Government policy responses around the world will be critical determinants of the speed and vigor of the recovery.” While discussing the economic stimulus plan, Bernanke said, “The Federal Reserve will do its part to promote economic recovery, but other policy measures will be needed as well. The incoming Administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.” Bernanke added, "I am hopeful that later in 2009, depending on factors, particularly including financial and credit markets, we should begin to see some stabilization in the economy. It takes a while though for labor markets to recover.”
  • Meanwhile, President-elect Obama said that he would not include the $3,000-per-job credit to employers in the stimulus package. House Democrats are also considering dropping a net operating loss carry-back proposal that has been under discussion for inclusion in the stimulus package.
  • Bernanke’s speech can be accessed here.

US AND FRANCE AMEND TAX TREATY:  Today, the US Ambassador to France and the French Minister of Finance signed a protocol updating the US-France income tax treaty. Key provisions in the protocol include:

  • A zero percent withholding rate for direct dividends paid by a US or French company if its beneficial owner is a resident of the other country, if:
    • The beneficial owner has owned, directly or indirectly through one or more residents of either the United States or France, shares representing 80% of the voting power of the payor company (for U.S. purposes) or 80% of the capital of the payor company (for French purposes) for a 12-month period ending on the date on which entitlement to the dividends is determined; and
    • The beneficial owner satisfies certain requirements under the limitation on benefits article
  • Elimination of withholding on royalty payments
  • Mandatory arbitration for cases in which the competent authorities are unable to reach agreement. A Memorandum of Understanding, also signed today, provides rules and procedures for such arbitration. The results of arbitration are binding on both countries.
  • Amendments to the limitation on benefits article, including an updated derivative benefits test
  • A rule for determining whether an item of income derived through a fiscally transparent entity will be treated as derived by a resident of France or the United States
  • A rule providing that neither country may refuse to supply information because the information is held by a financial institution, is held by a nominee or agent, or because it relates to ownership interests in a person
  • Elimination of a rule allowing collection assistance with respect to citizens in certain circumstances
  • For taxes withheld at source, the provisions of the protocol will be effective January 1 of the year the protocol is approved by both countries and enters into force. For all other taxes, the provisions of the protocol will apply January 1 of the year after the protocol into force. Mandatory arbitration is applicable to cases under consideration by the competent authorities as of the date the protocol enters into force and all cases that come under consideration after that time.
  • For additional information, contact Philip R. West - pwest@steptoe.com 
  • Additional information can be accessed here

TAX BILLS INTRODUCED JANUARY 12TH:
S.201: A bill to amend the Internal Revenue Code of 1986 to extend the additional standard deduction for real property taxes for nonitemizers for 2010.
Sponsor: Sen Barrasso, John [WY] (introduced 1/12/2009)      Cosponsors (None)

S.207: A bill to amend the Internal Revenue Code of 1986 to allow a deduction for health insurance premiums.
Sponsor: Sen Boxer, Barbara [CA] (introduced 1/12/2009)      Cosponsors (None)

S.209: A bill to amend the Internal Revenue Code of 1986 to modify and extend the credit for alternative motor vehicles, and for other purposes.
Sponsor: Sen Boxer, Barbara [CA] (introduced 1/12/2009)      Cosponsors (None)

S.210: A bill to amend the Internal Revenue Code of 1986 to increase the credit for employers establishing workplace child care facilities, to increase the child care credit to encourage greater use of quality child care services, to provide incentives for students to earn child care-related degrees and to work in child care facilities, and to increase the exclusion for employer-provided dependent care assistance.
Sponsor: Sen Boxer, Barbara [CA] (introduced 1/12/2009)      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
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.