New taxes in health care act impact California Medical Device Manufacturers

My most recent article appears in the Los Angeles Daily Journal dated August 31, 2012.   It deals with the new medical device tax and what manufacturers need to do in order to plan for it.  There are lots of subtle issues to be addressed regarding the implementation of this tax, including transfer pricing issues.  Well advised medical device manufacturers should speak to their counsel regarding such tax.  A link to the article appears here.

Estate Tax Situation - What were they smoking

The Orange County Business Journal wrote an excellent article on the estate tax situation and the number of high profile people who recently died when there was no estate tax. The article discusses whether a retroactive estate tax could be constitutional. I commented on this issue for the article noting that while the law was murky, it was practically impossible to collect such a tax, so the point may be moot. The article is quoted here

SEC says US unable to meet EU equivalence criteria

This is potentially very big news. The Hedge Funds Review is reporting that senior regulators at the SEC have stated that the U.S. is unlikely to be able to comply with the equivalence criteria proposed by the European Union (EU) parliament. This could mean that US hedge funds may not be able to market to European investors. Obviously this is a developing story and it is extremely unlikely that the European markets would ever be closed to US funds, however, this is very significant news and needs to be continually monitored.

Reuters is reporting that four more UBS clients have been charged with tax evasion. One of the cases involved $20 M in assets hidden at UBS. We should expect even more cases to be announced in the coming months, especially, when and if the U.S. government receives the majority of the data that UBS has agreed to provide in its agreement with U.S. federal prosecutors In recent months, the provision of such data was put in doubt by a finding by the Swiss Federal Court that such a disclosure is illegal. The Swiss parliament is currently considering legislation to permit UBS to disclosure such data. Given the political climate in the US and in Switzerland generally, it is likely that the U.S. government will be successful in obtaining such data. . Given the scope of the potential cases, the U.S. government does not have the resources to prosecute everyone so it is likely that they will pick the largest and most egregious caes.

HSBC Data Theft Affects 24,000 Swiss Accounts

Reuters is reporting that HSBC's private banking arm has announced that a previously reported theft of client data from its Swiss branch involved far more accounts than it had previously acknowledged. The story is here

Stolen data has played a significant role in government crackdowns on tax evaders. Many governments, will pay for stolen data about such taxpayers., e.g., the LGT bank account crackdown by numerous governments including the German and U.S. governments, were propagated primarily based upon stolen data purchased by German tax authorities.

This story could get very dramatic very quickly. Any HSBC customers with Swiss accounts are well advised to consult their tax advisers if they are concerned that they have not correctly reported the income and assets of such accounts.

Redomiciliation of Cayman Island Parent into Switzerland or Ireland

I am quoted a recent article in Portfolio magazine on the Garmin transaction. Garmin was a multinational corporation doing business in the U.S. and elsewhere. Its parent corporation was incorporated in the Cayman Islands. Garmin recently announced that it was changing the jurisdiction of its parent's incorporation to Switzerland. Publicly filed documents gave several reasons for this transaction including the advantageous tax treaty network in Switzerland, a perceived closeness to European customers and the negative public perception regarding Cayman Island companies and the (realistic) possibility of adverse legislation in the U.S. and elsewhere directed at such companies.

International tax practitioners both in-house and outside are noting a trend towards such redomiciliation transactions. The public perception of Cayman Island corporations and potential adverse legislation cannot be dismissed. In the case of many multinationals, the tax treaty network, low corporate tax rates and potential tax holidays could make Ireland or Switzerland even more attractive than the Caymans. It is a worthwhile exercise for multinationals to evaluate whether redomiciliation could work to their advantage.

IRS Announcement 2010-9 Introduces New Tax Reporting Transparency Standards

My recently published article, “Announcement 2010-9 Introduces New Tax Reporting Transparency Standards,” concerns IRS Announcement 2010-9, which proposes additional reporting requirements with respect to uncertain tax positions of certain business taxpayers. This generally includes taxpayers who are subject to Fin 48 or other similar international accounting standards. The IRS is in the process of developing a schedule, which must be filed with such taxpayers’ returns, in which the taxpayers would disclose their uncertain tax positions. Many practitioners have expressed concern that such a schedule could require taxpayers to disclose otherwise privileged information and could create an audit roadmap. The potential application of 2010-9 in the investment funds context could raise additional issues.

Until recently, the IRS has exercised a "policy of restraint" with respect to tax accrual work papers, except in the case of "listed transactions." Many practitioners believe that 2010-9 is a sign that this "policy of restraint" is beginning to change. It is possible that 2010-9 is a result of the Textron decision, which is currently being appealed to the U.S. Supreme Court, which addressed whether tax accrual work papers were privileged.

The article focuses on these issues and poses some additional issues and clarifications that will hopefully be addressed in future guidance.

Levin Bill would exempt most unrelated debt financing income from taxation

I was extensively quoted in an article appearing in the March 4 Hedge Fund Law Report which discusses the Levin bill (HR 3497) to (largely) eliminate taxation on debt financed income of U.S. tax-exempts investing in private equity and hedge funds.

In general, tax-exempts are subject to U.S. federal income tax on their unrelated trade or business income (UBTI.) UBTI includes debt financed income (UDFI.) UDFI arises principally in two ways: (1) the tax-exempt borrows to purchase an investment or (2) in the case of an investment in a partnership, LLC or other tax pass-through, the pass-through itself is leveraged, so that the tax-exempt is deemed to have borrowed its pro rata share of the debt of the pass-through for purposes of the UDFI rules.

Many tax-exempts invest through foreign blocker corporations, which effectively blocks the UDFI. However, as discussed at length in the article, foreign blockers also have their drawbacks. For example, if the fund engages in a U.S. trade or business, the blocker could be subject to U.S. taxation (ECI risk) and blockers are not typically entitled to tax treaty benefits.

The Levin Bill would change the definition of UDFI to render blockers unnecessary solely for UDFI blocking. There are, however, numerous circumstances where blockers are still useful.
In this article, I (and other commentators) discuss typical UDFI blocker structures including master feeder structures, as well as parallel and hybrid structures and the advantages and disadvantages of each.

The article is available here

Islamic Finance Article from today's WSJ

Doing God's Work Islamic finance is meant to reconcile both commercial and religious ideals. It's a tall order.

This article briefly discusses Islamic finance, Islamic Project Finance and the inconsistencies in what different Shariah Boards deem to be Islamic. There is a brief discussion of the Dubai debacle.

Although this article is very brief, it does pose important questions about Islamic finance structures without rigorously analyzing them. A longer follow up article would be a great idea.

Senate Passes the HIRE Act

The Senate passed the Hiring Incentive to Restore Employment Act (HIRE), H.R.2847 on February 24, 2010. It is unclear whether the House will pass this legislation. This is a stripped down version of the Reid jobs bill that includes:

• a $5000 payroll tax credit for companies that hire long unemployed workers
• a one year extension of the increased current expensing of capital expenditures (section 179 extension)
• an expansion of the Build American Bonds program
• a 2 year deferral of the worldwide interest allocation provisions
• the 30 % withholding tax on foreign banks, trusts, and corporations that fail to identify U.S. account holders (see prior coverage of the Foreign Account Tax Compliance Act and related provisions).
  

Real Estate Revitalization Act of 2010

A relatively obscure piece of proposed legislation could have a dramatic impact on foreign investment in U.S. real estate and in REITS - making such investments much more attractive to foreign investors.

Non-U.S. persons are not generally subject to tax on U.S. source capital gains. A major exception to this rule is capital gain resulting from the sale of U.S. real estate, which is subject to tax as if it were U.S. effectively connected income, pursuant to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

The Real Estate Revitalization Act would exempt a sale of the stock of a United States real property holding corporation (USRPHC) from such taxation. A USRPHC is a U.S. corporation if the fair market value of its United States real property equals 50% or more of its aggregate value. Under current law, by contrast, interests in such domestic corporations, including real estate investment trusts (REITs), generally could not be sold by non-U.S. persons without imposition of U.S. federal income or withholding taxes

In addition, dividends and liquidating distributions paid by REITs that are attributable to gains derived by the REIT from the sale of US real property would no longer be subject to U.S. federal income tax (or the U.S. federal branch profits tax applicable to non-U.S. corporations) under FIRPTA.

Thus, as currently proposed, the Act would provide significant benefits to non-U.S. persons who invest in U.S. real estate through a U.S. corporation, including a REIT. Investors could sell shares of such entities without U.S. federal income or withholding tax. Moreover, as is currently the case for 5% or lesser investments in public REIT securities, non-U.S. investors would be subject to U.S. federal withholding tax on REIT capital gain dividends and liquidating distributions at ordinary income rates (generally, at a rate of 30% or a lower treaty rate). Certain classes of investors, such as foreign pension funds in designated treaty jurisdictions and sovereign wealth funds, would be exempt from U.S. federal income and withholding taxes on REIT capital gain dividends and liquidating distributions, provided that certain requirements are met.

It is unclear whether this Act will be enacted into law. It does not appear in the most recent Reid Bill.

Accounting Firm Tied to Rothstein Slams Suit as Smear Campaign

It is a really scary time for all professional advisers, especially those of us who advise private equity and hedge funds. I would put fund-to-fund advisers into this category of those who should be scared. Defrauded investors are now looking to sue the accounting firm that apparently prepared the tax returns for Scott Rothstein's law firm. Mr. Rothstein is the latest power-broker/attorney accused in a $1.2B Ponzi scheme. While it remains to be seen who knew what information and when, most tax return preparers are focused primarily on getting the tax numbers correct and not on whether their client is defrauding investors. Return preparers seldom do much diligence on whether their client may be OVERstating their income. However, a tax return preparer does have access to significant financial information and could, under some circumstances, detect financial fraud.

Should all professional advisers be concerned about trying to detect financial fraud during the course of rendering their professional services?