Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.
Volume 7, Number 1
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.
The U.S. Tax Outlook 2007
The U.S. tax law in 2007 will continue to focus on priorities that have emanated from recent legislative and administrative developments. While high profile tax cases and related rationales always represent an integral part of U.S. tax law development, the I.R.S. and Treasury intend to use their new found enforcement tools to address perceived tax abuses, particularly in cross border transactions. The U.S. Treasury and the I.R.S. have been recognized as key interested parties and stakeholders in corporate governance legislation (Sarbanes-Oxley) and governmental regulatory bodies (Securities and Exchange Commission, Public Company Accounting Oversight Board). In this regard, compliance with U.S. Accounting Pronouncement FIN 48, Uncertain Tax Positions, for financial reporting purposes, will have significant collateral effects for the I.R.S.
In addition, the 2007 U.S. tax outlook must consider the impact on legislative tax policy from Democratic control of both the House of Representatives and the Senate. With this in mind, the outlook is as follows:
Cross Border Transactions
There will be additional scrutiny of cross border transactions, focusing on transfer pricing and specific taxpayer/ transaction concerns.
Transfer pricing will focus on the use and transfer of intangible property and the performance of services. In Notice 2006-34, the I.R.S. requested information regarding cross border licensing agreements in order to issue guidance regarding the classification of income from such transactions. Depending on facts and circumstances, the I.R.S. would consider such income (i) a two-way licence; (ii) a reciprocal agreement not to sue for IP infringement; or (iii) sale or exchange of property. The income categorization would drive other U.S. tax consequences such as sourcing, trade or business determinations, etc. Regulations regarding R&D cost sharing arrangements will be considered further. The revised Cost Sharing Regulations proposed in August 2005 were meant to address U.S. Treasury's concern that intangible property was being exported by U.S. companies without due consideration. U.S. practitioners' comments on the regulations raised objections to their complexity and underlying commercial assumptions. Treasury hopes to respond to these comments in 2007.
In the inter-company services area, taxpayers have been given the option of applying new temporary and proposed service regulations as supplemented by I.R.S. Announcement 2006-50 and I.R.S. Notice 2007-3. The new regulations provide for passing certain general and administrative expenses at cost under the "Service Cost Method" (SCM). The SCM rules were due to take full effect on January 1, 2007, but this date has been extended to after 2007.
The I.R.S. will also continue to aggressively pursue enforcement to disallow and reverse U.S. tax benefits related to so-called "listed transactions." The term "listed transaction" refers to a specific set of facts that has been identified by the I.R.S. in administrative pronouncements as an abuse of U.S. tax law, the tax benefits of which will not be recognized by the I.R.S. The listed transactions identified, for example, would include those where a tax basis in a pass-through tax entity is artificially increased before a sale, where financial products are used to generate tax deductions without sufficient economic risk, and where foreign tax credits are unduly accelerated or transferred between taxpayers. See Notice 2004-67 for the most recent inventory of "listed transactions." In this regard, settlement initiatives have been instituted by the I.R.S. audit branch to encourage taxpayers who have engaged in such listed transactions to settle their outstanding tax liabilities. Examples of this initiative by the I.R.S. that will set the tone in this area for 2007 are:
2006 Legislation Affecting 2007 & the 2007 Legislative Outlook
- Announcement 2006-100 regarding updating procedures for dealing with listed transaction cases where the I.R.S. has been unable to reach a conclusion with the taxpayer. These procedures are designed to fully develop the facts and arguments as quickly as possible before the case is docketed for litigation.
- The issuance of proposed, temporary and final regulations under the JOBS Act of 2004 regardingthe obligation of tax advisors to maintain lists of clients who entered into listed transactions and to file a "Material Advisor Disclosure Statement" with respect to these clients.
The Tax Relief and Health Care Act of 2006 extended through 2007 several individual tax incentives and benefits that were to expire at the end of 2006. The more notable provisions include the option to deduct state sales and use tax or state income tax on personal tax returns; the availability of the tax credit for research expenditures; and the deduction of qualified environmental remediation costs.
The legislative outlook for 2007 will be heavily influenced by the Democratic Party agenda. Targeted tax relief for "middle class" Americans (education tax incentives, working class family tax reductions) coupled with a scale back of prior tax rate reductions for wealthy individuals are expected.
Continued focus on financial statement transparency, cross border transactions and undue tax avoidance coupled with the Democratic tax legislative priorities will pressure U.S. international tax planning in 2007. But the "$64,000 question" still remains unanswered Will the U.S. Estate Tax be scrapped in 2010? We shall have to wait and see.