Inbound Distribution Company

 

The IRS Large Business and International Division (“LB&I”) announced the identification and selection of 13 campaigns that will be the focus of the agency’s enforcement efforts.  The campaigns have been implemented to deploy IRS resources to address the most serious tax administration risks, including transfer pricing compliance of US Inbound Distribution Companies.

 

Sharon Porter, director of the Treaty and Transfer Pricing Operation Practice Area, is the lead executive for this campaign.  Its goal is to verify whether inbound distributors receive an arm’s length return rather than the losses or small profits some inbound distributors, especially in the middle market, have been earnings.  IRS believes that there was a widespread practice of not adequately compensating inbound distributors in the middle market and caused a substantial revenue loss for the Government.

 

U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive audit strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue.

 

Take Away:  It is expected that there would be increasing number of audit selections among U.S. distributors of goods sourced from foreign-related parties and the adequacy of these inbound distributors’ intercompany pricing would be scrutinized.  In order to avoid above complexes with the taxing authority and the sever IRC Section 6662 penalties, U.S. inbound distributors with foreign related party sourcing should obtain contemporaneous documentation with respect to its transfer pricing arrangement.

 

A copy of IRS’s Practice Unit is attached for your reference.

[Reference: Inbound Resale Price Method Routine Distributor.pdf]

Substantial Change to Landscape of Individual Taxation

 

The House Ways and Means Committee unveiled its tax reform legislation and it contains many provisions that may substantially change the landscape of individual taxation, if enacted.  To be signed into law, the House bill must be collaborated with the Senate bill (soon to be released), pass through both Congress of House and Senate, and signed by the president.  Here are some notable provisions, generally effective for the tax year 2018, included in the House bill which may require your advance notices:

 

Tax Rate Change

Under the House bill, the current seven brackets would be consolidated and simplified into four brackets.  The rates under the bill would be as below:

 

Single Taxpayer		Married Filing Jointly
Taxable income	Tax rate	Taxable income	Tax rate
$0 to $45,000	12%	$0 to $90,000	12%
$45,000 to $200,000	25%	$90,000 to $260,000	25%
$200,000 to $500,000	35%	$260,000 to $1,000,000	35%
$500,000 or more	39.6%	$1,000,000 or more	39.6%

 

Standard Deductions

Under the House bill, the standard deductions would be increased to $24,000 from $12,700 for joint filers and $12,000 from $6,350 for single individual.  These amounts would be adjusted for inflation based on CPI.

 

Personal Exemptions

Under the provision, the deduction for personal exemptions would be repealed.  Currently, the personal exemption amount is $4,050 per person (including tax filers and any dependents).

 

Principal Residence Gain Exclusion

Under current law, a taxpayer may exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) of gain on the sale of a principal residence, if the property has been owned and used as the taxpayer’s principal residence for two out of the previous five years.  However, under the House bill, the taxpayer would have to own and use a home as the taxpayer’s principal residence for five out of the previous eight years to qualify for the exclusion.  In addition, the taxpayers can use the exclusion only once every five years.

 

Personal Deductions

The overall limitation of itemized deductions would be repealed, however, following deductions would be repealed at the same time:

• Medical expense deduction
• Casualty and theft loss deduction
• Tax preparation fee deduction
• Moving expense deduction

 

Alimony

Under the House bill, alimony payments would not be deductible by the payor or includible in the income of the payee.  The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017.

 

Mortgage Interest Deduction

The mortgage interest deduction on existing mortgages would remain the same.  However, for principal residence acquired after November 2, 2017, the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 from the current $1.1 million.  Additionally, interest would be deductible only on a taxpayer’s principal residence.

 

State and Local Tax Deduction

Under the House bill, individuals would not be allowed an itemized deduction for state and local income or sales taxes.  Additionally, real property tax deduction would be limited to $10,000.

 

S-corps and Partnerships (“Passthrough Entity”)

Passive activity income from a passthrough entity would be taxed at the 25% tax rate.  Generally, nonpassvie activity income from a passthrough entity would be taxed at ordinary income rate.  This provision is expected to give a large tax break for real estate investors (including Donald Trump himself).

 

1031 Like-Kind Exchange Applies to Real Estate Only

The bill limits tax deferral provision under Section 1031 (known as “Like-Kind Exchange”) to real estate.  Currently, business owners were able to defer taxation on gain disposing a business by investing in a similar business.  However, this tax deferral provision would be allowed for real estate transactions.

Some of these provisions contained in the House bill would have a direct impact to many of us.  Although we are expecting mark-ups by the Senate in the coming weeks before the bill gets enacted, however ones should continually monitor the legislation development specially if you are contemplating a transaction.

2018년 중요 개인 세법 개정안

 

하원의 세입 세출 위원회가 최근 세제 개혁 법률을 공개했다. 공개된 세제 개혁 법률은 여러 조항의 규정들을 포함하고 있으며 법규화 된다면 개인 세법에 중대한 영향을 끼칠 것으로 보여진다. 법률화 되기 위해서는, 의회 법안과 곧 공개될 예정인 상원의 법안이 합의 절차를 통과하여 대통령의 승인을 받아야 한다. 공개된 법안에 나와 있는 규정들 중 2018 과세 연도 부터 실행될, 사전에 주목할 만한 규정들을 소개한다.

 

세율 변경

법안에 따르면, 기존의 7개의 세율 등급이 간소화 되어 4개의 등급으로 통합 될 것이다. 법안에 공개된 세율은 아래와 같다.

독신자 (Single taxpayer)		부부 공동 신고자 (Married Filing Jointly)
과세 대상 소득 (Taxable income)	세율 (Tax rate)	과세 대상 소득 (Taxable income)	세율 (Tax rate)
$0 to $45,000	12%	$0 to $90,000	12%
$45,000 to $200,000	25%	$90,000 to $260,000	25%
$200,000 to $500,000	35%	$260,000 to $1,000,000	35%
$500,000 or more	39.6%	$1,000,000 or more	39.6%

 

표준 공제 (Standard Deduction)

법안에 따르면, 공동 신고자의 경우 표준 공제가  $12,700에서 $24,000로 인상되며 독신자의 경우 $6,350 에서 $12,000으로 인상 될 예정이다. 이 금액은 소비자 물가 지수 (Consumer Price Index)를 토대로 인플레이션에 맞게 조정될 예정이다.

 

인적 공제 (Personal Exemption)

법안에 따르면, 인적 공제가 폐지 될 예정이다. 현재 인적 공제 금액은 세금 신고자와 부양가족을 포함하여 한 사람당 $4,050 이다.

 

주 거주지 소득 배제 (Principal Residence Gain Exclusion)

현행 법에 따르면, 납세자는 최근 5년 중 2년 이상 소유하고 주 주거지로 사용한 주택을 판매 할 경우 그를 통해 얻은 이익 중 일부를 총 소득(gross income)에서 배제 할 수 있다. 공동 신고자는 $500,000 까지  배제 할 수 있으며 다른 납세자의 경우 $250,000 까지 배제할 수 있다. 하지만, 새로 발표 된 법안에 따르면, 최근 8년 중 5년 이상 소유한 거주자에 한해서5년에 한번 씩 소득 배제가 가능하다.

 

개인 소득 공제 (personal Deductions)

항목별 공제 (itemized deduction)에 적용 되어온 소득에 따른 공제 제한은 폐지 될 예정이다. 하지만 하단에 나오는 공제 항목들은 없어질 예정이다.

• 의료 비용 공제
• 재해 또는 도난으로 인한 재산 손실액 공제
• 세무 보고 준비 비용 공제
• 이사 비용 공제

 

이혼 위자료 (Alimony)

법안에 따르면, 부양 금액은 더이상 지급인에게서 공제될 수 없으며 피지급인의 소득에도 포함 되지 않는다. 이 조항은 2017년 이후 집행되거나 수정된 이혼 판결 또는 별거 합의에 적용된다.

 

주택 융자 공제 (Mortgage Interest Deduction)

현존하는 주택 담보에 적용되는 주택 융자 공제에는 변동이 없다. 하지만, 2017 년 11월 2일 이후 주 주거지로 취득한 주택의 경우, 주택 취득 (acquisition indebtedness) 총액에 적용되는 제한이 $1.1 million에서 $500,000로 인하 될 것이다. 또한, 이자액 공제 역시 납세자의 주 주거지에만 적용 될 예정이다. 이 법안은 앞으로의 주택 매매에 많은 영향을 끼칠 것으로 예상된다.

 

주세와 지방세 공제 (State and Local Tax Deduction)

법안에 따르면, 개인은 주 소득(state income), 지방 소득 (local income), 판매세 (sales tax)에 항목별 공제를 적용할 수 없게 되며 부동산 재산세에 적용되는 공제액은 $10,000로 제한 될 예정이다.

 

S-Corps and Partnerships (“Passthrough Entity”)

도관 회사 (Passthrough entity)의 수동적 활동 소득 (Passive activity income)에 25%의 세율이 적용 될 것이다. 보통 도관 회사의 비수동적 활동 소득 (non-passive activity income)의 경우에는 일반적인 세율이 적용된다. 이 조항은 도널트 트럼프를 포함한 부동산 투자자들에게 막대한 세금 우대를 제공할 것으로 보여진다.

 

1031 부동산 교환법 (1031 Like-Kind Exchange)

법안은  Section 1031 (“Like-Kind Exchange”)에 명시된 과세 유예 조항이 부동산에만 적용 되도록 제한한다. 현재, 사업주들은 비슷한 사업에 투자를 함으로써 사업을 처분하는데 생기는 이익에 대한 과세를 유예해 왔다. 하지만, 새로 공개된 이 과세 유예 조항에 따르면 앞으로의 과세 유예는 부동산 거래에만 국한 될 것이다.

이 법안에 포함된 조항들 중 몇가지는 우리에게 직접적인 영향을 안겨줄 것이다. 물론 법안이 통과되고 입법화 되기 전 상원에서 자세한 발표를 하겠지만, 현재 여러가지 거래로 고민하고 있는 사람이라면 계속해서 입법 과정을 주시하며 지켜볼 것을 권한다.

Tax Reform Legislation Update

 

Draft tax reform legislation was released by the House Ways of Means Committee on November 2, 2017.  The Senate Finance Committee is working on its own version of tax reform legislation which is expected to be released in the next few weeks.  Before legislation could be sent to the president, both the House and the Senate would need to pass identical versions of the legislation.  At this time, it is unclear how much of the reform legislation of the Senate will differ from the released House bill.

The House legislation mirrors many of the provisions listed in the Republicans’ tax reform framework and provides new details.  Below is a summary of some of the notable provisions contained in the House legislation:

 

Individuals

• Imposes four tax rates on individuals: 12%, 25%, 35%, and 39.6% effective tax year 2018.  The maximum rate of 39.6% applies to single taxpayers with $500,000 or more taxable income and $1,000,000 or more taxable income for married taxpayers filing jointly.

• The standard deduction increases from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married taxpayers filing jointly effective 2018.

• Most of personal deductions would be repealed, including the medical expense, alimony deduction, the casualty loss deduction, and the deduction for state and local income or sales taxes. Deduction for state and local real property taxes would be limited to $10,000 effective 2018.

• Deduction for mortgage interest attributable to acquisition indebtedness (acquired after November 2, 2017) in excess of $500,000 would be disallowed. However, the mortgage interest deduction on existing mortgages would remain the same - $1.1 million acquisition and home equity indebtedness.

 

Alternative Minimum Tax (“AMT”)

• The AMT would be repealed effective 2018.

 

Estate & Gift Tax

• The estate tax exclusion amount would be increased to $11 million from $5.5 million. The estate tax would be repealed after 2023.

 

S-corps and Partnerships (“Passthrough Entity”)

• Passive activity income from a passthrough entity would be taxed at the 25% tax rate. Generally, non-passvie activity income from a passthrough entity would be taxed at ordinary income rate.

 

Business

• The bill introduces a flat 20% tax rate.
• The bill introduces 100% expensing of qualifying property (excluding no real property) acquired and placed in service after September 27, 2017 and before January 1, 2023.
• Net operating losses (“NOLs”) deduction will be limited to 90% of taxable income. NOLs will have indefinite carryforward period with no carryback provision.
• Repeal Section 163(j) limitation for interest paid to related party, but introduces a deduction limitation of 30% of adjusted taxable income for businesses with average gross receipts in excess of $25 million.
• Repeal Section 199 domestic activity deduction.
• Disallow deductions for entertainment, amusement, or recreation activities.
• The bill limits tax deferral provision under Section 1031 to real estate.
• Most business and energy credits would be repealed except for research and development (“R&D”) credits.
• The performance-based compensation exception for Section 162(m) 1 million officer compensation limitation would be repealed. And covered employees subject to Section 162(m) will increase.

 

International

• The bill would introduce a dividend exemption for foreign source dividend received by 10% U.S. corporate owners.
• Repeal Section 902 indirect foreign tax credit provision.
• Repeal Section 956 which subjects immediate taxation on a controlled foreign corporation’s undistributed earnings that are reinvested in U.S. property.
• Unremitted foreign earnings as of December 31, 2017 would be immediately taxed at rate of 12% (for earnings attributable to cash or cash equivalents) or 5% (for the remainder).

 

As mentioned above, the House tax reform legislation faces a number of significant legislative procedures and hurdles prior to being signed into law.  We will continually monitor and provide updates on any developments.