TEI campaigns against counterproductive measures in pending tax bill; also comments on Schedule M-3, [section] 482 per se list; launches new website.

This issue of The Tax Executive is late, so not all the activities in this "Recent Activities" story are all that recent. And while the reasons for the delay are many, a primary cause was the diversion of time, resources, and personnel to help design, test, and launch a new website for the Institute. "We apologize to TEI members and other readers of the magazine for the delayed publication, but our decision earlier this summer to postpone the launch of the website, in order to more fully take into account member feedback, has had a ripple effect throughout the organization," explained TEI Executive Director Timothy McCormally.

"The launch of the site at the end of August, of course, is not the end of the process, but we are confident that the new website--which is more fully integrated with the Institute's print publications than its predecessors --will actually enhance our ability to keep members up to date. For example, submissions, articles, and other news--from the chapters as well as the Institute--will now be available to the members on a real-time basis, simply by going to www.tei.org.

"We appreciate the patience of the membership as TEI's new website strategy was being designed and implemented," Mr. McCormally concluded. "We invite everyone's feedback on how we can improve the site to better advance the Institute's mission." For more on the website, please see this issue's Less Taxing Matters column.

Advocacy and Education Remain Dominant

Work on TEI's website did not cause the Institute's technical committees to go on hiatus or extended recess, as some legislative bodies have been known to do during the summer months. Indeed, while officialdom fled Washington--the Democrats going to Boston and the Republicans to New York for their nominating conventions--TEI continued its campaign against the codification of the economic substance doctrine and the CEO signature requirement on Capitol Hill.

In its comments on the tax bill, TEI began by supporting efforts to enactment ETI-replacement legislation this year. Nevertheless, the Institute urged Congress to rethink several proposals, which it deemed counterproductive. Among the specific proposals that TEI said are ill-advised are:

* The "clarification" of the economic substance doctrine, which could potentially interfere with legitimate business transactions;

* The CEO declaration requirement, which would waste corporate resources without enhancing accountability;

* The "whistleblower" provision, which would outsource an inherently governmental function, i.e., the determination of tax, and possibly encourage the filing of mischievous or malicious claims against taxpayers;

* The restriction of section 162's ordinary-and-necessary-expense rule, which would potentially deny a deduction for costs associated with safety recalls, aircraft maintenance, or environmental cleanups; and

* The expansion of section 269, which would threaten to inject significant uncertainty into the tax treatment of transactions and potentially overturn the major simplification effected by the "check-the-box" provisions.

TEI's comments are reprinted in this issue, beginning on page 331.

Schedule M-3

The summer also saw significant progress on the government's efforts to enhance the disclosure of book-tax differences on the tax return. In July, TEI filed comments with the IRS and Treasury Department on the draft of the final version of the Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More. The new schedule expands upon the information corporations are required to file with their current Schedule M-1.

In a July 21 letter to Acting Assistant Treasury Secretary Gregory Jenner and LMSB Commissioner Deborah Nolan, TEI President Ray Rossi commended the government for its efforts to expedite the examination process and the collaborative approach it took in developing the new schedule. "Taxpayers share the government's hope," Mr. Rossi stated, "that the new schedule will focus (or even eliminate) examinations, reduce the time required to produce information during audit, and eventually eliminate the need to file Form 8886 for many book-tax differences."

TEI expressed concern about some information required by the Schedule M-3, noting that "many taxpayers would have preferred the elimination of Column A of Parts II and III (rather than the one-year delayed effective date)." Nevertheless, Mr. Rossi commended the government for making the filing of the information optional for the first year to give taxpayers additional time in which to modify and redesign the necessary systems. "It will also give the government time to determine whether the information is necessary, in light of the other data filed with the return," he added.

A follow-up meeting with the IRS and Treasury Department on the new schedule was held on August 2, with the Institute's delegation to the meeting being led by Nell Traubenberg of Storage Technology Corporation, chair of TEI's Federal Tax Committee. TEI urged the government to be flexible in permitting taxpayers to rely on the tax shelter disclosure "angel list" in not including certain transactions on the new form. Within a matter of days, the Treasury issued a series of FAQs that adopted the Institute's recommendations.

"TEI did not ask for the Schedule M-3, but having been faced with it, we are delighted with the collaborative approach the Treasury and IRS took to developing and refining the form," said Ray Rossi about the government's outreach to TEI and other stakeholders in respect of the new Schedule M-3.

The Institute's July 21 letter is reprinted in this issue, beginning on page 330

Financial Accounting Convergence: Comments on IAS 12

On July 27, TEI filed comments with the International Accounting Standards Board on IAS 12, Deferred Tax Accounting for Intercompany Profits in Inventory. In its letter to IASB Chairman Sir David Tweedie, TEI President Ray Rossi expressed concern about the financial statement distortions that in some instances may be caused by IAS 12.

"To improve the comparability and transparency of financial reporting," the Institute said, "IASB [should] consider converging IAS 12 with Financial Accounting Standard (FAS) Statement 109, Accounting for Income Tax, of the U.S. Generally Accepted Accounting Principles (GAAP)." Such an approach would be consistent with the October 2002 memorandum of understanding issued by the IASB and FASB committing to moving toward convergence.

"Until that convergence is accomplished," the Institute's letter continued, "the IASB should consider modifying IAS 12 to compute deferred tax for intercompany profits in inventory using the tax rate applicable in the jurisdiction of the seller."

TEI's comments focused on the appropriate tax rate applicable to the recognition of intercompany profit from the sale of inventory. IAS 12 recognizes the deferred tax effect is at the buyer's tax rate, while under FAS 109, the deferred tax effect is booked at the seller's tax rate. The Institute supported the latter treatment, noting that the international standard "can create distortions when it is applied to the intercompany profit on inventory that is eliminated in consolidation, particularly when there is a significant difference between the tax rate of the related company selling the inventory and that of the controlled company holding the inventory."

"In contrast, under the FAS standard, the tax charge that is deferred is the one that has actually been borne in the jurisdiction of the subsidiary that either manufactured or acquired the inventory for resale to the distribution subsidiary," the TEI president stated. He recommended that IAS 12 be conformed to FAS 109.

The Institute's comments are reprinted in this issue, beginning on page 334.

Section 482 Per Se List

Earlier this year, TEI testified at an IRS hearing on proposed regulations under section 482 relating to services. Following up on that testimony, the Institute in July filed comments on the development of a per se list of low-margin and non-integral services that should qualify for a cost safe harbor under the regulations.

In its July 2 letter to Treasury's International Tax Counsel Barbara Angus, the organization expressed concern about the proposed elimination of the cost safe harbor and its replacement with the simplified cost-based method (SCBM). The treatment of non-integral services under current regulations "has served taxpayers and (we believe) the government well for nearly four decades," TEI said. The Institute urged the government to retain the current cost safe harbor, expressing its appreciation for the IRS and Treasury's willingness "to consider an alternative to SCBM that would permit charges to be made at cost for certain low-margin and nonintegral services."

TEI explained that certain low-margin and non-integral services that fall within the regulations' definition of a "controlled services transaction" (because they are perceived as providing a "benefit") should nonetheless be charged at cost under the final regulations. To further this goal of simplification and to reduce taxpayer burdens, the Institute recommended that the cost safe harbor be retained, at least with respect to certain enumerated services.

"The final regulations should provide for the development of a list of low-margin and non-integral services that could be charged at cost," the tax organization stated. "Most back-office services are typically routine, low-margin services for which charging cost is reasonable and appropriate. In the case of non-integral services, neither the service provider nor recipient is normally in a position to develop comparable uncontrolled transaction data."

Attached to the Institute's letter was a list of routine, low-margin services, which TEI explained was representative of the types of services companies may charge at cost. The Institute recommended that the list be issued in the form of a revenue procedure that could be updated annually. TEI's July 2 letter is reprinted in this issue, beginning on page 326. TEI's December 22, 2003, comments on the proposed services regulations were reprinted in the January-February 2004 issue of The Tax Executive.

Dutch Treaty Protocol

The protocol to the U.S.-Dutch treaty that was signed in March was the subject of comments submitted by TEI to the Senate Foreign Relations Committee. The Institute's July 8 letter to Committee chairman Richard Lugar urged the Senate to ratify the protocol before adjournment this year.

Noting that a fundamental purpose of bilateral income tax treaties "is to eliminate double taxation of income," TEI called the current treaty between the United States and the Netherlands "antiquated." The new protocol will eliminate the withholding tax on subsidiary-parent dividends paid to Dutch companies and thus encourage increased foreign investment in the United States, the Institute explained. The organization also praised the modernization of the Limitation on Benefits article and the improved procedures for exchanging information between the two countries.

The Institute's letter to Senator Lugar is reprinted in this issue, beginning on page 332.

VAT Registration in Acceding Countries

TEI has also sent a follow-up letter to Stephen Bill of the European Commission on the practical implications of making intra-EC supplies of good to VAT-registered customers in the 10 countries admitted to the European Union on May 1. The April 9 letter responds to Mr. Bill's March 22 letter discussing TEI's concerns about delays in VAT registrations in the acceding countries.

The Institute expressed concern that businesses will not receive their EU VAT registration numbers until after the admission date, making it impossible to update billing systems. The problem is especially acute for "foreign" non-established businesses, TEI stated.

The organization urged the adoption of a transitional period until December 31, during which a customer's domestic VAT registration number in an acceding country will be accepted as sufficient evidence of taxable status to support zero-rating of intra-EU trade, provided the supplier has reasonably confirmed that the customer is in business and likely to be VAT registered.

The Institute's letter is reprinted in this issue, beginning on page 336. Its March 1 letter on the same topic was published in the March-April issue of The Tax Executive.