Singapore, IRS Oversight Board, U.S. liaison meetings focus of TEI's winter activities: institute also comments on proposed Canadian changes.

Tax Executives Institute's advocacy truly became global in scope in February when the Asia Chapter filed its first submission with the Singapore government. Submissions to the IRS Oversight Board and the Canadian Department of Finance, plus the agendas for TEI's U.S. liaison meetings, rounded out its technical activities this winter.

U.S. Liaison Meetings

TEI's liaison meetings with U.S. tax officials were held on February 8, providing the Institute an opportunity to raise important issues of tax policy and administration on behalf its members. TEI held separate meetings with the Commissioner of Internal Revenue, officials of the Large and Mid-Size Business Division, and the U.S. Treasury Department's Office of Tax Policy. Among the issues discussed with the Treasury Department were the proper tax treatment of cross-licensing agreements, open issues under section 199 of the Internal Revenue Code (relating to the manufacturing deduction), the definition of "employer" for purposes of Circular 230 (relating to practitioner standards), the cost-sharing regulations, and the most recent version of a proposed statutory economic substance requirement. The meetings with IRS Commissioner Everson and LMSB Commissioner Nolan covered some of these issues, as well as the IRS's electronic filing program for corporations, the need to safeguard the independence of Appeals, Schedule M-3,and LMSB's Compliance Assurance Process program.

TEI's delegation to the liaison meetings was led by TEI President Michael Boyle of the Seattle Chapter and included both members of the Institute's Executive Committee and several committee chairs.

The full agendas for the liaison meetings are reprinted in this issue, beginning on page 130. As this issue goes to press, the minutes of the meetings are being reviewed by the government. They will be published in the May-June issue (and will be posted on TEI's website upon being completed).

Singapore: Treatment of Benefits-In-Kind

On February 3, TEI filed comments with Singapore's Ministry of Finance on recently issued guidelines on the taxation of benefits-in-kind provided to employees. The comments--which were filed under the auspices of TEI's Asia Chapter, its first advocacy project since being chartered in 2005--have already produced positive results, with the Singapore government's recently announcing that it was continuing to review the matter and that, in the meantime, employers may follow existing practice.

The Singaporean guidelines sought to change the tax treatment of certain benefits-in-kind (including transportation reimbursements and reimbursements for living expenses) by making them taxable to employees or taxable in excess of a specified per diem. TEI contended that the current practice approach of treating these "benefits" as the non-taxable of legitimate business expenses is correct. The Institute suggested that the guidelines would impose significant administrative burdens on employers, disrupt Singapore's globally dynamic economy by impinging employee business travel to Singapore, and conflict with Singapore's WorkLife Harmony Programme by taxing reimbursements for travel originating from an employee's home but not reimbursements for travel originating from an employee's office. The Institute recommended that any abuse could be curbed through the adoption of an "ordinary and reasonable" business expense requirement; it also suggested the effective date be postponed to permit review of the proposal.

TEI's letter to Singapore's Ministry of Finance is reprinted in this issue, beginning on page 122.

Testimony before IRS Oversight Board

On February 8, TEI Senior Vice President David L. Bernard testified before the IRS Oversight Board, responding to the Board's invitation for the Institute's views on how well the IRS responds to the customer service needs of taxpayers. TEI used the opportunity to address currency initiatives, the IRS's e-filing mandate, the independence of Appeals, and IRS Service Center issues.

The Institute's written comments--which are reprinted in this issue beginning on page 124--highlighted the currency initiatives that the IRS's Large and Mid-Size Business Division has developed. Reducing audit cycle time is a good measure of customer service because it improves audits and audit coverage, TEI stated. But most telling in respect of customer service is that currency is best achieved through cooperation with taxpayers. TEI pointed to the trust, openness, and communication between taxpayers and the IRS fostered through the Joint Audit Planning Process developed jointly by TEI and LMSB, and highlighted several other programs LMSB has developed to improve currency by resolving disputes earlier, such as Limited Issue Focused Examination, Pre-Filing Agreements, Fast Track Settlement, and, most recently, the Compliance Assurance Process pilot program. TEI urged the Oversight Board to encourage the IRS to make all of these programs more widely available.

TEI raised significant concerns, however, about the IRS's e-filing mandate (issued in January 2005), which the Institute said was an example of how not to deliver good customer service. The significant burdens associated with a move to mandatory e-filing were initiated without consultation with the affected taxpayers, and significant challenges remain. While TEI supports the goal of increasing the IRS's use of technology, Mr. Bernard testified that the e-filing mandate imposes unnecessary costs on taxpayers and threatens the orderly processing of returns for the 2006 filing season. The organization suggested four ways that the IRS could have avoided the "ready ... fire ... aim!" approach being used to implement mandatory e-filing: (1) reach out to affected taxpayers before the mandate was issued, (2) use a phased-in implementation, (3) permit more time to test new systems, and (4) make guidance on securing waivers a higher priority.

The Institute also stressed the importance of the independence of the Appeals function to good customer service, alerting the Board to the Institute's concerns regarding Announcement 2005-80. This announcement set out concession terms for 21 transactions. (TEI's comments on Announcement 2005-80 appeared in the January-February 2006 issue of The Tax Executive.)

Finally, TEI noted concerns in respect of the Philadelphia Service Center's processing of applications for individual tax identification numbers (Form W-7) that companies often take responsibility for filing for dependents of non-U.S, citizen employees transferred from overseas, as well as processing applications for U.S. residency certifications (Forms 8802). These applications are frequently rejected for no apparent reason, and TEI suggested that identifying the reasons for the rejection and any appropriate remedies would show a commitment to good customer service.

Subsection 17(8) of the Canadian Income Tax Act

On March 9, TEI urged the Canadian Department of Finance to amend paragraph 17(8)(a) of the Income Tax Act of Canada to address a potential anomaly in the application of that provision. TEI's letter follows up on an issue discussed at the Institute's December 2005 liaison meeting with the Department relating to indebtedness arising in connection with the acquisition by a controlled foreign affiliate (CFA) of the shares of another CFA where the acquired CFA shares constitute "excluded property." (The agenda for this meeting was published in the November-December 2005 issue of The Tax Executive.)

During the liaison meeting, TEI asked the Department to consider amending the paragraph 19(8)(a) to exclude a loan amount owed by a CFA where another provision--clause 95(2)(a)(ii)(D)--would apply to any interest on the amount owing if the amount were owing to another CFA. The Department said this did not seem unreasonable but invited TEI to comments on whether, from a policy perspective, any restrictions should be imposed on the use of the lent funds apart from a requirement that the acquired shares be "excluded property."

TEI's March comments, which are reprinted in this issue beginning on page 143, concluded that no additional restrictions (beyond those already in the various provisions of the Income Tax Act) on the use of funds lent to a CFA to acquire shares of another CFA that are "excluded property" to the acquiring CFA are warranted or required.

Canadian Proposals on Treatment of Restrictive Covenants 

In a February 10 letter, TEI expressed concerns about proposed amendments to the Canadian Income Tax Act to revise the tax treatment of restrictive covenants. The proposed amendments respond to two court decisions that held that amounts received by a vendor for a non-competition agreement in connection with the sale of the vendor's shares of a corporation are not taxable. The decisions have spawned uncertainty about the proper treatment of non-competition payments received in connection with the sale of a business.

While TEI acknowledged the desirability of legislation to clarify the treatment of such amounts, it asserted that the proposed restrictive covenant provisions are overbroad. The proposed amendments would change the longstanding treatment of some forms of non-compete payments. In addition, the Institute said the legislation would apply to many agreements to which they should not, disrupting the well-settled tax treatment of many transactions, and causing inequitable and untenable tax results. TEI urged the Department to revise the legislation accordingly.

TEI's letter to the Department of Finance is reprinted in this issue, beginning on page 144.

Follow Up on Appeals Independence

On January 17, 2006, Tax Executives Institute sent a letter to IRS Commissioner Mark W. Everson, expressing concern about Announcement 2005-80 on the independence of the Appeals function. The letter, which was reprinted in the January-February 2006 issue of The Tax Executive, gave rise to a discussion at TEI's annual liaison with Commissioner Everson and other senior officials of the Internal Revenue Service, including David B. Robison, the IRS's National Director of Appeals, about the role of Appeals in tax administration. Following that meeting, TEI sat down with Mr. Robison to get him to expand on his comments during the meeting. That interview is published in this issue, beginning on page 94.

TEI ADVOCACY AT A GLANCE

* Agenda for TEI-Treasury Department Liaison Meeting, page 130

* Agenda for TEI-LMSB Liaison Meeting, page 138

* Interview with IRS National Director of Appeals on the Independence of Appeals, page 94

* TEI Asia Chapter Letter to Singapore Ministry of Finance regarding Tax Treatment of Certain Benefits-In-Kind Provided to Employees, page 122

* Testimony of TEI before the IRS Oversight Board on Customer Service Needs of Taxpayers, page 124

* Letter to Canada's Department of Finance Regarding Subsection 17(8) of the Income Tax Act, page 143

* Letter to Canada's Department of Finance Commenting on Legislative Proposals Relating to Treatment of Restrictive Covenants, page 144