This country-specific Q&A provides an overview to tax laws and regulations that may occur in United States.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax
How often is tax law amended and what are the processes for such amendments?
The last comprehensive reform of the U.S. tax code was in 1986. However, almost every year Congress adds or amends individual provisions to the tax code. Amendments to the tax code must be passed by both the House of Representatives and the Senate, and generally must be signed into law by the President.
In addition to the statutory tax code, the Internal Revenue Service (IRS) promulgates regulations on a regular basis that provide the Treasury Department’s official interpretation of the tax code. New or revised regulations can make significant changes in the tax law. Significant IRS regulations are published in draft form and include a notice and comment period that provides for public consultation.
Both Democrats and Republicans for several years have been proposing various versions of comprehensive tax reform. With Republicans controlling both branches of Congress and the presidency after the 2016 elections, the chances of comprehensive tax reform in 2017 is higher.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Taxpayers are required to file tax returns each year. Tax returns are generally due by April 15th of the following calendar year for individuals, and for corporations by the 15th day of the third month following the end of its fiscal year. Automatic 6 month extensions of time to file a return are available. Companies (and certain individuals, such as self-employed individuals) generally are required to make quarterly payments of their estimated tax liability.
Generally, taxpayers are required to maintain adequate records for at least three years. Records must be kept for as long as the statute of limitations is open for that item. Thus, in certain situations where the statute of limitations is longer than three years, records must be kept for 7 years or even indefinitely. In addition, many substantive provision of the tax code and regulations have their own separate record keeping requirements.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The IRS is a part of the U.S. Treasury Department and is the regulatory authority of the U.S. for tax. The most recently available survey from the IRS Oversight Board shows that in 2014, 74% percent of taxpayers were satisfied with their interactions with the IRS, a drop of 4 percentage points from 2013. The drop in satisfaction may be due to budgetary constraints that has somewhat limited the ability of the IRS to provide taxpayer services.
The length of time to resolve tax issues varies greatly and depends on the complexity of the issues. There is no standard amount of time that a tax dispute will take to resolve. Although the vast majority of tax disputes are settled prior to litigation, some disputes, especially those that go to litigation, can take years to resolve.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Tax disputes can be resolved administratively or judicially. Within the IRS, the IRS Office of Appeals is an independent appeals process where taxpayers can resolve tax disputes. The Office of Appeals will try settle tax disputes without litigation. If no settlement is reached, a taxpayer can still dispute the tax in federal court. Taxpayers can bring tax cases in federal court to the U.S. Tax Court, a federal district court, or the U.S. Court of Federal Claims. All of these courts are independent of the IRS.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Taxpayers do not need to pay disputed tax in advance of litigation in cases before the IRS Appeals or the Tax Court. Tax disputes before a federal district court or the Court of Federal Claims must be paid in advance.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
The tax code provides for strict confidentiality and non-disclosure rules for taxpayer information. Criminal penalties may be imposed on people who disclose tax information. Other agencies of the Government can only receive taxpayer information in limited situations and with a court order.
The U.S. has entered into numerous tax treaties and Tax Information Exchange Agreements under which the U.S. will exchange tax information on a government to government basis in certain situations.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
It is unclear whether the US will become a signatory of CRS and the U.S. does not maintain of public register of beneficial ownership.
In 2010, the U.S. introduced the Foreign Account Tax Compliance Act (FATCA) which was the basis for CRS. While CRS is aimed at similar objectives as FATCA, there are significant differences between CRS and FATCA including the scope of information to be reported, the definition of a financial institution and the applicable de minimis levels.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Many of the BEPS recommendations are embodied by the rules already in effect in the U.S. For example, Treasury views the BEPS recommendations on transfer pricing (Actions 8-10) as being consistent with the arm’s length standard under the existing section 482 regulations.
The U.S. has released proposed revisions to the U.S. Model Income Tax Convention to reflect the BEPS project, which included changes to the Limitations of Benefits article (Action 6), to special tax regimes (Action 5), and certain aspects of permanent establishments (Action 7).
The U.S. has also taken steps to implement CbC reporting (Acton 13), but has not adopted the other aspects of Action 13 including the “Master File” requirement.
With respect to interest deductions (Action 4), the US took a decidedly different direction than the BEPS recommendations by issuing new recharacterization rules and documentation requirements, which is different than the fixed ratio approach contemplated by Action 4.
Is there a GAAR and, if so, how is it applied?
The U.S. does not have a general statutory GAAR, but relies on judicially developed doctrines such as substance over form, business purpose, sham transaction and economic substance. In 2010, Congress codified the judicially developed economic substance doctrine. Under Section 7701(o), where the economic substance doctrine is relevant, a transaction will be deemed to have economic substance only if it changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
In addition, many provisions of the tax code and regulations have anti avoidance provisions.
U.S. tax treaties contain a Limitation on Benefits (LOB) provision that limits “treaty shopping” by non-residents of the treaty country to claim benefits under the treaty.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
a. Taxation of business profits
Corporations are taxed at a graduated rates. The corporate tax brackets are indexed to inflation. The following rates are for the 2016 tax year.
- Income up to $50,000 - 15%
- $50,000 to $75,000 - 25%
- $75,000 to $10M - 34%
- $10M and above - 35%
Although corporations are taxed at a graduated rates, the first two brackets are gradually phased out. The first bracket phases out by a tax of 5 percent on income between $100,000 and $335,000. The second bracket phases out by a tax of 3% on income between $15,000,000 and $18,333,333.
b. Taxation of employment income and pensions
There are four filing statuses and seven brackets for individual federal income tax. The rates are graduated and the brackets are indexed to inflation. The following table is for the 2016 tax year.
Tax Rate Single Married filing Jointly Married Filing Separately Head of Household 10% $0 -$9,275 $0-$18,550 $0 -$9,275 $0-$13,50 15% $9,275 to $37,650 $18,551—$75,300
$13,251—$50,400 25% $37,651—$91,150 $75,301—$151,900
$50,401—$130,150 28% $91,151—$190,150
$75,951—$115,725 $130,151—$210,800 33% $190,151—$ 413,350
$115,726—$206,675 $210,801—$413,350 35% $413,351—$415,050
$206,676—$233,475 $413,351—$441,000 39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more
Individuals are also subject to employment taxes, at the rates below.
- Social Security– 6.2% paid by both the employer and employee up to a cap of $127,200 for 2017. Self employed individuals are responsible for the total 12.4%.
- Medicare - 1.45% paid by both the employer and employee. An additional 0.9% Medicare tax is imposed on wages in excess of $200,000 ($250,000 if married filing jointly). Self employed individuals are responsible for the total 2.9%.
- Federal Unemployment Tax – only paid by the employer at a rate of 6% up to $7,000 paid to each employee.
In addition, a net investment tax of 3.8 percent applies to the lesser of income from interest, dividends, certain capital gains, rental and royalty income and non qualified annuities, and the amount a person’s modified adjusted gross income exceeds $200,00 ($250,000 if married filing jointly).
Most states impose a state income tax in addition to the federal tax above.
c. VAT (or other indirect tax)
There is no VAT tax in the U.S. A sales tax applies in most states.
d. Taxation of savings income and royalties
Interest, royalties, and ordinary dividends are taxed as ordinary income. Qualified dividends are taxed at the same rate as capital gains. See 10f.
In addition the net investment tax described in 10a may apply.
e. Taxation of income from land
Income from land is taxed either as a capital gain or ordinary income depending on why the land was held. For example, gain from the sale of land that was held primarily for sale to customers in a trade or business will be ordinary income.
The disposition of a U.S. real property interest by a foreign person is generally subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) . FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests as income effectively connected to a U.S. trade or business and taxed under the ordinary tax rates in 10a.
f. Taxation of capital gains
For individual taxpayers, the capital gains rate varies based on which tax bracket the taxpayer is in (See 10b): 0% on income in the 10% or 15% bracket; 15% on income in the 25%, 28%, 33%, or 35% brackets; and 20% on income in the 39.6% bracket.
Special rates apply for specific categories of capital gains. For example, gain from the sale of collectibles is taxed at a 28% rate, and part of the gain from the sale of certain real property (generally, the gain that is due to depreciation) is taxed at a 25% rate.
A corporation’s capital gains are taxed at the same rates as ordinary income. See 10.A.
Capital losses can only offset capital gains and may be carried back three years and forward five years to offset capital gains.
g. Stamp and/or Capital duties.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes. Corporate tax is a tax on the profits of the corporation. However, certain provisions of the tax code, such as depreciation allowances, may differ from commercial accounting principles.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
Yes. Corporations, partnerships, estates and certain trusts generally are treated as separate entities for federal tax purposes. Partnerships and certain trusts are not subject to tax at the entity level.
Certain entities (generally LLCs) may “check the box” to elect how they are classified for federal tax purposes. Except for entities that are per se corporations (such as state law corporations or similar foreign entities), an entity with at least two members can choose to be taxable as a corporation or a partnership, and a business entity with a single member can choose to be taxable as a corporation or disregarded as an entity separate from its owner.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
The U.S. taxes the worldwide income of U.S. companies. A company is a U.S. company if it is incorporated in the U.S. Foreign corporations are subject to tax in the United States on its income that is effectively connected with a U.S. trade or business and on certain of its income from U.S. sources.
Individual citizens of the U.S. generally are taxed on their worldwide income regardless of their country of residency.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
There are no special federal tax zones in the United States. The U.S. does have recognize special rules for certain entities, such as Regulated Investment Companies, Real Estate Investment Trusts, Domestic International Sales Corporations, Real Estate Mortgage Investment Conduits and S Corporations.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
The U.S. does not have a patent box regime. There have been recent proposals for the U.S. to adopt a patent box regime, perhaps as part of a broader comprehensive tax reform.
The U.S. does have a research and development tax credit that provides an incentive to develop intellectual property. In addition, section 174 provides for an immediate deduction of research and development expenses, i.e. such expenses are not required to be capitalized.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
The U.S. allows for related companies to file consolidated returns. For these purposes, companies are related if they have a common parent owning stock in at least one of the controlled corporations and are connected through stock ownership of at least 80% of the voting power and 80% of the value of the stock of the controlled corporation.
Certain entities are generally not eligible to part of a consolidated group including foreign companies, tax-exempt companies, certain insurance companies, companies electing to take the possession tax credit under Section 936, regulated investment companies, real estate investment trusts and S corporations.
Is there a CFC or Thin Cap regime?
The U.S. operates a CFC regime. Generally, a foreign corporation is a CFC if more than 50 percent of its value or voting power is held by one or more 10 percent voting U.S. shareholders. Under the Subpart F rules, certain income (including, in part, certain related party income, certain passive income, and certain oil and gas income) of a CFC is includible in its U.S. parent’s taxable income. In addition, a CFC’s investment in United States property is generally taxable to its 10 percent U.S. shareholders.
The U.S. also has thin capitalization rules under Section 163(j) that apply to U.S. companies and foreign companies engaged in a U.S. trade or business. Generally, if a company has a debt-to-equity ratio that exceeds 1.5 to 1, part of any interest paid to a related party that is not subject to U.S. tax may be not be deductible.
Under regulations published October 13, 2016, debt between certain related companies issued after January 1, 2018, must meet new documentation rules or the debt will be presumed to be equity. This rule does not apply to foreign issuers of debt. In addition, in certain instances debt instruments between related companies are automatically treated as equity.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Yes. The U.S. has detailed and comprehensive rules governing transfer pricing in Section 482 of the tax code and the regulations promulgated thereunder. Taxpayers may obtain a unilateral, bilateral or multilateral APA.
Are there any withholding taxes?
Yes. Most U.S. source income, except for capital gains, that is paid to a foreign person is subject to a 30 percent withholding tax. The withholding rate may be reduced or eliminated by a tax treaty. Further, the disposition of a U.S. real property interest by a foreign person is generally subject to FIRPTA withholding of 15 percent. Withholding may also apply at a 30 percent rate under FATCA for non-compliant entities.
Are there any recognised environmental taxes payable by businesses?
The U.S. imposes environmental taxes on crude oil and petroleum products (oil spill liability), and on the use or sale of ozone-depleting chemicals. Oil spill liability is imposed on crude oil received at a U.S. refinery and to petroleum products entered into the U.S. for consumption, use or warehousing at a rate of $.08 per barrel. Ozone-depleting chemicals are taxed at various rates based on the weight of the ozone-depleting chemicals.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Corporations are often permitted to deduct dividends received from other U.S. corporations. A 70 percent dividend received deduction is allowed for corporate recipients that own less than 20 percent of the stock of the dividend-paying corporation. An 80 percent deduction is allowed to corporate recipients owning 20 percent or more of the stock of the dividend-paying corporation. A 100 percent deduction is allowed for dividends received from a domestic corporation in the same affiliated group. An affiliated group is generally a group of corporations eligible to file consolidated returns. See 17 above.
In certain circumstances, a dividend received deduction is available for dividends paid by a foreign corporation. To be eligible, the foreign corporation must not be a passive foreign investment company, must be subject to U.S. tax (i.e. it must have a U.S. trade or business), and at least 10 percent of the vote and value must be owned by the recipient corporation. The deduction is only allowed with respect to the U.S. source portion of the dividend.