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TEI's advocacy continues apace.

The new year ushered in a new administration in Washington, D.C., and with it a series of legislative proposals to rejuvenate the faltering U.S. economy. Even more President Obama's inauguration, Tax Executives Institute's technical committees began their review of the proposals with the goal of submitting a TEI statement to Congress urging the inclusion of business tax relief provisions in the economic stimulus bill--a statement that was filed on February 3.

In addition, while a new administration and Congress leads to a change in the tax policy agenda, TEI's mission of improving tax administration is timeless. February is the traditional time for the Institute's annual liaison meetings with the IRS and this year's agendas are a fresh reminder of the need to remain fully engaged in bad times as well as good.

Finally, TEI's expansion in Europe is paying dividends in the expanded scope of its advocacy reach. The influence of the Organisation for Economic Co-operation and Development (OECD) on global tax administration is being monitored--and increasingly shaped--by TEI. Comments on proposed revisions to Article 7 of the OECD's Model Tax Convention round out this issue's latest advocacy summary.

Business Tax Relief- Economic Stimulus Bill

Efforts by the Obama Administration and Congress to enact proposals to stimulate the economy led TEI to weigh in on February 3, 2009, urging the House and Senate tax-writing committees to enact business tax relief provisions as part of the measure. Noting that "no sector of the economy has been untouched by the economic downturn," TEI urged Congress to:

* Lengthen the carryback period for net operating losses to five years without a reduction in the amount of the losses to be carried back.

* Lengthen the carryback period for general business tax credits to five years and temporarily permit 100 percent of a taxpayer's net income tax liability to be offset by the general business credit.

* Extend the provision allowing additional first-year depreciation on qualified investments.

* Extend the period in which taxpayers may claim accumulated alternative minimum tax credits or research tax credits in lieu of the additional depreciation on qualified investments.

* Extend the research tax credit and make it permanent. At a minimum, extend the credit through December 31, 2010.

Upon enactment of the American Recovery and Reinvestment Act, TEI President Vincent Alicandri expressed disappointment that the final law included only a few measures--such as the bonus depreciation rules--of direct benefit to businesses. "The omission from the final bill of an expanded carryback period for larger companies was especially disappointing," he said, "since both houses of Congress originally passed the proposal." He added that Congress has likely not completed its tax agenda for the year, saying, "TEI will continue to monitor congressional developments and weigh in as opportunities--and member needs--warrant."

TEI's statement urging adoption of business tax relief provisions in the stimulus bill is reprinted in this issue, beginning at page 65.

Washington Liaison Meetings

Led by Mr. Alicandri, a delegation of Executive Committee members and committee chairs met on February 12-13, 2009, with the Commissioner of Internal Revenue, the acting Chief Counsel, and officials of the IRS Large and Mid-Size Business Division. The issues addressed during the meeting include the effect of the economic downturn on the IRS's administration of the tax system, especially the processes for quick refunds and tentative carryback adjustments, key compliance initiatives, examination-related matters, and the potential effects on tax administration arising from a transition to International Financial Reporting Standards.

The examination-related matters discussed during the meeting included: an update on key international tax compliance challenges, competent authority issues, the IRS's participation in the joint international tax shelter information center, the IRS's utilization of tax data (especially Schedule M-3), the effect of the issue-tiering process (including the recent addition of withholding taxes as a Tier 1 examination issue), the section 6038 information reporting relating to qualified employee stock options, penalties for noncompliance with section 6039 information reporting requirements relating to Form 5471 (including the effect of filing a skeletal return to facilitate a quick refund or tentative carryback), possible changes to the process for claiming the refundable credit in lieu of bonus depreciation under section 168(k)(4), the status of the IRS's policy of restraint in seeking tax accrual workpapers, and the potential for expanding a pilot process for using secure email to facilitate the examination process.

Mr. Alicandri remarked that the annual liaison meetings afford the Institute an opportunity to discuss pressing matters in tax administration and build its relationship with the IRS. By discussing TEI's submissions and agenda topics, the Institute can improve tax administration for the benefit of taxpayers and the government, he said. "The discussions help members and government participants understand one another's concerns. By becoming involved in the annual U.S. or Canadian liaison meeting processes, members can make a difference in how the tax system is administered."

Mr. Alicandri added that TEI traditionally hosts an annual meeting with officials from the Office of Tax Policy of the U.S. Treasury Department. "Because of vacancies in the Assistant Secretary for Tax Policy and Deputy Assistant Secretary positions occasioned by the transition in Presidential administrations," he explained, "the Treasury Department meeting was postponed. We expect to schedule a meeting sometime this spring."

The agendas for the meetings are reprinted in this issue, beginning at page 67. The minutes will be published in a future issue of the magazine.

Article 7 of the OECD Model Tax Convention

Building on its earlier work earlier relating to the attribution of profits to permanent establishments, the OECD released a discussion draft of a new Article 7 (Business Profits) of its Model Tax Convention in July 2008. Responding to the OECD's invitation for comments on the discussion draft, members of the European Direct Tax Committee and the European Chapter's Permanent Establishment Committee held a series of conference calls during the summer and fall to catalogue a list of taxpayer concerns and comments on the revised Article and treaty commentary. Those efforts culminated in a letter from Institute President Vince Alicandri to the OECD on January 15, 2009.

The letter commends the OECD for updating Article 7 and the commentary, expressing support for the OECD's efforts to ensure uniformity in the methods for attributing profits among associated enterprises governed by Article 9 and the methods for attributing profits between a Head Office and a Permanent Establishment (PE) governed by Article 7. TEI also expressed support for the implementation of practical profit attribution methods and ensuring that tax administrators' approaches are consistent with the concepts in the authorised OECD approach to transfer pricing.

TEI President Alicandri observed that a threshold question is how to ensure that the underlying dealings between a PE and the Head Office (and the rest of the enterprise) are valid and properly documented. "Once documented," he said, "the profits can be properly allocated." That said, "TEI does not support imposing more stringent profit allocation methods or documentation requirements on dealings between a PE and Head Office under Article 7 than apply to transactions among associated enterprises under Article 9." As a result, TEI urged the OECD to provide additional guidance on acceptable documentation of underlying dealings in order to discourage Member States from imposing more stringent profit allocation methods, documentation, or other requirements for PEs.

TEI's letter noted that despite taxpayers' best efforts to comply with myriad jurisdictional rules to which they are subject, business activities in a particular jurisdiction may exceed the de minimis thresholds for permitted preparatory or auxiliary activities and a PE may be inadvertently created. Where that occurs, taxpayers may not have the documentation and records available to support a proper attribution of profits. As a result, TEI's letter urged the OECD to consider providing guidance on the conditions that would afford taxpayers a grace period to satisfy documentation requirements.

Next, despite assurances in the proposed commentary that relief should be afforded where two states attempt to tax the same profits, TEI observed that the lack of a direct mechanism requiring full relief from double taxation ensures (1) a greater risk of double taxation and (2) divergent treatment of group companies and PEs. Consequently, the letter urged the OECD to consider adopting a measure similar to Article 9(2) directly in Article 7.

Finally, the letter comments on a number of other areas, including the need to clarify the effective date of the application of the proposed commentary, the commentary's allocation of asset costs, the treatment of dependent agent PEs, and the treatment of employee costs under Article 15 of the Model Tax Convention.

Mr. Alicandri noted that one of the goals for the year is to increase the Institute's advocacy to the OECD. He expressed appreciation to Johann H. Muller, chair of the Institute's European Direct Tax Committee; Anna Theeuwes, chair of the European Chapter's Permanent Establishment Committee; and TEI Tax Counsel for their efforts in developing the Institute's submission.

TEI's letter to the OECD is reprinted in this issue, beginning at page 73.
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Title Annotation:Tax Executives Institute
Publication:Tax Executive
Date:Jan 1, 2009
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