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Monthly Archives: March 2019

SC Ruled that Injured Rail Workers' Compensation is Taxable

According to Law360, the U.S. Supreme Court ruled on March 4, 2019, that a railroad company’s payments to an injured employee for lost wages are taxable, saying the definition of “compensation” for railway workers is similar to “wages” under the Social Security system.

In overturning the Eighth Circuit’s decision that personal injury awards for railroad employees cannot be taxed, the Supreme Court said the circuit court got it wrong when it construed “compensation” to mean only pay for active service.
The decision resolves a disconnect between the definitions of taxable compensation in two federal statutes that are supposed to work together to fund retirement benefits for rail employees who do not participate in the Social Security system. The Railroad Retirement Act, or RRA, created benefits for rail staff, and the Railroad Retirement Tax Act, or RRTA, established the taxes needed to fund the benefits.
In a 7-2 opinion, Justice Ruth Bader Ginsburg noted that Congress created the railroad retirement system and the Social Security system during the Great Depression to ensure financial security for employees when they reach old age.
“Given the similarities in timing and purpose of the two programs, it is hardly surprising that their statutory foundations mirror each other,” she said.
The case is BNSF Railway Co. v. Michael D. Loos, case number 17-1042, in the U.S. Supreme Court.
 
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New Section 250 Regulations Allow Individuals to Get a Foreign Tax Deduction

According to Law360, Individual taxpayers with businesses abroad can elect for corporate treatment and receive a deduction on their intangible income worth up to 50 percent, according to regulations released by the U.S. Treasury Department on March 4, 2019.
 
The regulations, on Section 250 , outline that individuals can use Section 962 ,to have subsidiaries they own treated as if they were corporations subject to the Tax Cuts and Jobs Act’s tax on global intangible low-taxed income. Tax practitioners were unsure whether Section 962 would enable individual taxpayers to use GILTI’s 50 percent deduction, which statutorily is available only to corporations.
March 4, 2019's regulations also detail new rules for how U.S. corporations can claim a 37.5 percent deduction on their foreign-derived intangible income, or income earned in the U.S. through the sale of products or services to foreigners for use abroad. Taxpayers will have to provide documentation, establishing in many cases not only their basis for believing that their goods are used abroad, but also details on the nature of their transaction, a potentially difficult administrative headache for a company with a large and complex overseas presence.
 
Both GILTI and FDII are key planks in the international framework of the TCJA, providing similar low rates, 10.5 percent and 13.125 percent, respectively for intangible income earned overseas or in the U.S. The dual rates are meant to create a carrot-and-stick result that, the TCJA’s authors claimed, would create a level playing field for companies deciding where to put their intellectual property and other valuable mobile assets.

In both cases, the low rate is established through a deduction that corporations can claim once their taxable income is tallied.

While the TCJA exempts most worldwide income from taxation, under GILTI it immediately sweeps in some foreign earnings, defined as intangible through a formula based on the amount of tangible assets the company holds offshore, and taxes them as if they were U.S. income. Corporations can then apply the Section 250 deduction and receive the low 10.5 percent rate. But that second step did not seem to be available to individuals, even though their income would still be taxed under GILTI.

That disparity left individual taxpayers with the possibility of a 37 percent rate on their overseas intangible income, what many considered to be an unfair and onerous burden.

Tax practitioners immediately explored the possibility of electing for corporate treatment under Section 962. But 962’s history indicated that it ensured only that individuals paid the same rate as corporations, not that they had access to the same deductions as corporations.

Citing a section of Section 962’s legislative history, stating that its purpose was to ensure that individuals’ tax burdens would “be no heavier than they would have been had they invested in an American corporation doing business abroad,” the proposed regulations mandate that income under Section 962 would be reduced by the amount of a Section 250 deduction that would have been available to a domestic corporation.

The proposed regulations are also the first window taxpayers have had into what kind of documentation Treasury will use to determine if a company is eligible for an FDII deduction.

FDII mirrors the treatment of GILTI, providing a 37.5 percent deduction on intangible income held domestically and equaling a rate of 13.125 percent. The provision is similar to a patent box, a popular policy in Europe that grants a lower rate to intangible assets such as intellectual property held in the jurisdiction. But the FDII deduction is available only on foreign sales.

Treasury outlined a series of rules and tests that companies would have to satisfy to verify that their income was really from foreign sales. Those rules also include exemptions to some of the documentation requirements for small businesses, or those with less than $10 million in annual sales or less than $5,000 from an individual customer, which were not set in the legal language of TCJA.

In the regulations Treasury also indicated it would distinguish between sales and services, which receive different treatment in the statute, based on the “overall predominant character of the transaction.”

Government officials in Europe and elsewhere have criticized the FDII tax benefit, claiming it subsidizes exports and ignores requirements from the Organization for Economic Cooperation and Development to include requirements that benefits to intellectual property be paired with real research and development. Challenges before both the OECD’s Forum on Harmful Tax Practices and the World Trade Organization are expected.

 
 
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IRS Issues Proposed Regulations on Deduction for Foreign-Derived Intangible Income and Global Intangible low-taxed income

The Internal Revenue Service issued proposed regulations under section 250 of the Internal Revenue Code, which offers domestic corporations deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income. Section 250, as well as section 951A dealing with global intangible low-taxed income, was added by the 2017 Tax Cuts and Jobs Act (TCJA).

These proposed regulations provide guidance on both the computation of the deductions available under section 250 and determination of FDII. In addition, the proposed regulations provide rules for the computation of FDII in the consolidated return context. Proposed guidance on the computation of global intangible low-taxed income was published in the Federal Register on Oct. 10, 2018.

New reporting rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are also described in the proposed regulations.
Importantly, These Newly Released Regulations Confirm That an Individual or Trust That Has Made a 962 Election

Is Allowed to Take the 250 Deduction Resulting
in an Effective 10.5% Rate.


Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

 
Have an International Tax Problem?   


 

Contact the Tax Lawyers at 

Marini & Associates, P.A. 
 for a FREE Tax Consultation Contact US at
or Toll Free at 888-8TaxAid (888 882-9243).
 

Read more at: Tax Times blog