TEI opposes LIFO repeal, urges retention of current practice for filing schedule E: also comments on Canadian Tax Reform and other topics, releases U.S. liaison meetings Minutes.
TEI also advised Canada's new government on ways to improve the Canadian tax system. Additionally, the Institute submitted comments, for the fifth time, critiquing the latest itineration of proposed Canadian legislation on taxation of foreign investment entities.
Coordinated by the Institute's new European Tax Committee, comments were also submitted to the European Commission on modernization of the value-added tax (VAT) system. Finally, the minutes of TEI's February 2006 liaison meetings with the U.S. Department of Treasury and IRS's Large and Mid-Size Business Division have been released.
Repeal of LIFO
On June 9, 2006, TEI President Michael P. Boyle sent a letter to Senators Charles E. Grassley and Max Baucus, chair and ranking member of the Senate Finance Committee, urging the retention of the LIFO inventory accounting method. A proposal to repeal the LIFO method was included in the proposed Gas Price Relief and Rebate Act of 2006, but was subsequently withdrawn to permit Congress additional time to study the issue.
Mr. Boyle noted that "repealing the LIFO method--which the Code has permitted for nearly seven decades--would adversely affect many business taxpayers by increasing their tax bills, potentially leading to a significant loss of U.S.-based jobs." He explained that the objective of LIFO is to permit taxpayers to properly match their current sales revenues with the current replacement costs and thereby compute--and pay taxes on--a meaningful gross profit amount.
"Under LIFO," Mr. Boyle said, "changing prices for various components of manufactured or purchased inventory are reflected immediately in the cost of goods sold rather than being capitalized in inventory. As a result, in a period of rising prices, the LIFO method tempers the distortive effect of inflation on the taxpayer's reported profits. Under the LIFO method, U.S. businesses are able to recoup more quickly the rapid increases in the replacement cost of the products they manufacture or purchase."
First permitted in the Revenue Act of 1938, the LIFO method is widely used by many taxpayers. The LIFO method is likely the predominant method of accounting in industries that carry inventories of goods, especially those engaged in manufacturing, mining, wholesaling, retailing, distribution, and energy production, TEI's president stated.
"For nearly 70 years," Mr. Boyle concluded, "the LIFO method has provided for the proper matching of revenues and expenses in the computation of the cost of goods sold and taxable profits, especially in periods of rising prices." Moreover, taxpayers may use LIFO only if their financial accounting treatment of inventory conforms with their tax accounting method. "Raising the taxes of a significant segment of the U.S. economy--LIFO users--without considering the anti-competitive effects of LIFO's repeal on those businesses is short-sighted and may produce unintended consequences that are far greater than the immediate tax revenues obtained."
The Institute's letter is reprinted in this issue, beginning on page 237.
E-Filing and Schedule E
On May 31, TEI expressed its opposition to an IRS proposal to require taxpayers to electronically file (in XML format) Schedule E, Compensation of Officers, beginning in the 2006 filing period. Schedule E requires a taxpayer to list officer names, Social Security numbers, time devoted to the business (expressed as a percentage), and the amount of corporate stock owned (expressed as a percentage), as well as the amount of compensation.
In a letter from TEI President Boyle to IRS Deputy Director of International Programs Elvin T. Hedgpeth--who is overseeing the e-filing mandate for the IRS--the Institute noted that the proposal raises substantial privacy concerns and would impose significant administrative burdens without an offsetting benefit. For the current 2005 filing season, taxpayers may file the Schedule E by noting that compensation information will be provided upon request. "We see no compelling compliance reason to alter this approach," TEI stated.
TEI's letter grew out of a two-day meeting in May of the TEI-IRS Forms and Attachments Task Group, which had begun discussing the requirements electronically filing corporate tax returns for the 2006 tax return year. During the two-day meeting, the group reviewed each form that is now subject to the 2005 transition rules permitting some forms to be filed in PDF format and others on paper. For the 2006 filing year, the IRS is considering requiring taxpayers to file the information in XML format. Because of privacy concerns, TEI urged the IRS to reconsider and was invited to submit additional comments.
Urging the IRS to maintain the current practice of requesting confidential information upon audit, TEI offered two alternatives: (i) modify Form W-2 to add an additional letter code (e.g., corporate officer designation), which would enable the IRS to match the information; or (ii) parallel the SEC's approach by treating a consolidated group of companies as one entity for Schedule E purposes and request compensation data (excluding social security numbers) for the top five corporate officers.
The Institute's letter is reprinted in this issue, beginning on page 226.
Canadian Tax Recommendations
On April 18, TEI submitted a series of recommendations for improvements to Canada's tax legislation to the new Canadian government. The government announced a first-ever web-based pre-budget consultation in advance of releasing its 2006 Budget message.
The Institute commended the new government for holding pre-budget consultations, noting they provide an important avenue to gather input from Canadians across the country. TEI offered recommendations to spur economic efficiency, improve tax administration, and enhance the competitiveness of Canada's business tax system. Specifically, TEI urged the government to:
* Implement phased corporate income tax rate reductions and eliminate the corporate surtax as soon as practicable, as well as accelerate the effective date of the elimination of the Large Corporation Tax (LCT) to January 1, 2006.
* Afford businesses sufficient time and transitional rules to update their information and recordkeeping systems in order to facilitate orderly implementation of the GST rate reduction while minimizing costs and administrative burdens.
* Expeditiously negotiate and implement a new provision in the Income Tax Convention with the United States eliminating withholding taxes on all dividends and interest for payments to both related and unrelated parties.
* Abandon or substantially narrow the Reasonable Expectation of Profit test in draft legislation clarifying the deductibility of interest and other expenses.
* Abandon draft legislation in respect of Foreign Investment Entities and Non-Resident Trusts and, if perceived abuses of the Income Tax Act cannot be addressed by Canada Revenue Agency (CRA) under the current provisions of the Income Tax Act, adopt narrower, more targeted remedies.
* Implement a corporate loss transfer system or group loss relief mechanism.
The new government released its budget message on May 2, 2006, adopting the first of TEI's budget recommendations to (i) implement a phased reduction of corporate income taxes, (ii) eliminate the corporate surtax, and (iii) accelerate elimination of the Large Corporation Tax effective as of January 1, 2006. The budget also implements the GST rate reduction as of July 1, 2006, and adopts transition rules for transactions that straddle the effective date. Finally, although the budget does not adopt the formal loss transfer system recommended by TEI, the budget legislation will expand the carryforward period for use of investment tax credits and net operating loss carryforwards.
Read TEI's recommendations for improvements to Canada's tax legislation, beginning on page 221.
Canadian Foreign Investment Entity Legislation, Take Five
On March 23, TEI sent a letter to the Canadian Minister of Finance urging the government to abandon proposed legislation affecting foreign investment entities. The Department of Finance released the fifth version of draft legislation relating to Foreign Investment Entities (FIE) and Non-Resident Trusts (NRT) in July 2005, replacing drafts released previously in June 2000, August 2001, October 2002, and October 2003. TEI had also filed comments on the earlier draft versions.
TEI reiterated its support for the government's objective of curbing illegitimate tax avoidance effected through "transfers to non-resident entities" but added that the proposed new and complex FIE provisions are not necessary to achieve the government's goals. The draft rules go significantly beyond the stated purpose of combating "tax avoidance" and implement a comprehensive new regime for taxing indirect foreign investment.
The Institute commended the Department's ongoing commitment to the consultative process and making important revisions to the proposal. Despite the Department's progress in improving the proposed legislation, TEI said, the most significant deficiencies remain. The rules are overbroad, extraordinarily complex, and confusing. Hence, the provisions will interfere with legitimate business operations, impede Canadian business expansion abroad, and undermine Canada's competitiveness.
The Institute urged the government to withdraw the proposed legislation. First, the proposal will apply to numerous compliant taxpayers that are not attempting to avoid Canadian tax by "transferring funds to offshore trusts or accounts." Second, the proposed legislation overlaps section 17 and will interfere with many legitimate commercial transactions. Third, the information necessary to comply with the proposed legislation's myriad reporting requirements or to take advantage of one or more relieving provisions or elections is either unavailable generally or will be difficult to obtain. Fourth, the Minister is accorded seemingly unfettered authority in certain circumstances to make various determinations, with taxpayers having no right to appeal these determinations. Fifth, the proposed legislation impedes foreign investment by Canadian companies and impairs their global competitiveness. And finally, taxpayers are suffering from "draft legislation fatigue" with respect to the proposed rules.
TEI's letter to the Department of Finance regarding proposed foreign investment entities legislation is reprinted in this issue, beginning on page 228.
Modernizing VAT Systems
On June 9, TEI submitted recommendations to the European Commission on modernizing the value-added tax obligations for financial services and insurances. The Commission released the consultation paper in May to generate feedback on options for changing the Sixth VAT Directive.
The letter from TEI President Boyle commended the Commission for undertaking the consultation, observing that every business, large or small, public or private, has a stake in the modernization because the Sixth Directive affects not only the financial service and insurance businesses, but every business that provides supplies to financial services companies, consumes financial services, or makes auxiliary supplies of financial services.
Mr. Boyle noted that the directive causes distortions in business transactions because of the outdated nature of the rules and their failure to keep pace with the evolution in financial markets, products, and the manner in which financial and insurance services are delivered. In addition, he said, "the rules do not reflect contemporary business trends and practices such as globalization, outsourcing, and offshoring."
Other infirmities in the current rules include conflicts between the VAT rules and the regulatory provisions governing financial institutions, the lack of uniformity among the Member States of the European Union in respect of the VAT legislation, and inconsistent or non-application of the decisions of the European Court of Justice. As a result, Mr. Boyle said, similarly situated taxpayers and economically equivalent transactions are not treated uniformly or consistently. The lack of uniformity and consistency, in turn, he concluded, "produces significant legal uncertainty and administrative burdens for taxpayers and Members States alike."
TEI encouraged the Commission to revamp and update the language of the VAT rules, especially in respect of definitions, exemptions, and recovery of input tax on exempt supplies. To enhance uniformity across the European Union, Mr. Boyle said, "Member States should be encouraged to look to, and model their rules after, the VAT legislation adopted by Member States with mature financial services and insurance markets." The organization also recommended that the Commission encourage all Member States to adopt the special method under Article 17(5) of the Sixth Directive. The United Kingdom has done so, Mr. Boyle observed, thereby permitting businesses to employ a range of methods to apportion VAT between exempt and taxable supplies. The different options, he said, allow businesses to apply the method that best reflects their specific business conditions.
TEI also strongly encouraged the European Commission to ensure that the rulings by the European Court of Justice (ECJ) interpreting VAT legislation are applied uniformly within the Member States.
Other comments addressed legal-form and corporate-structure driven VAT costs, which should be minimized by permitting cross-border grouping structures. Alternatively, TEI said, the Commission should consider implementing special rules that treat legal-entity to legal-entity transactions in the same fashion as branch-to-head-office transactions.
The letter concludes by encouraging the Commission to take up the treatment of leasing transactions in future consultations. The lack of uniformity in the rules governing the treatment of such transactions imposes significant compliance burdens and creates legal uncertainties for taxpayers, Mr. Boyle said.
TEI's comments are reprinted in this issue, beginning on page 238.
Minutes of U.S. Liaison Meetings Released
As previously reported, on February 8 a delegation from TEI, led by International President Michael Boyle, met with representatives of the U. S. Department of Treasury's Office of Tax Policy, including Acting Deputy Assistant Secretary for Tax Policy Eric Solomon. TEI's delegation included both members of the Institute's Executive Committee and several committee chairs. The agenda for the meeting is reprinted in the March-April issue of the The Tax Executive, beginning at page 130.
Among the issues discussed were the proper treatment of cross-licensing agreements, open issues related to the section 199 manufacturing deduction, the definition of "employer" for purposes of Circular 230's practitioner standards, the proposed cost-sharing regulations, and the most recent version of the proposed codification of the economic substance doctrine.
The minutes of TEI's liaison meeting with the Department of Treasury are reprinted in this issue, beginning on page 249.
Earlier that day, TEI held a liaison meeting with Commissioner Deborah M. Nolan and other officials of the IRS Large and Mid-Size Business Division (the agenda for the meeting is reprinted in the March-April issue of The Tax Executive, beginning at page 138). In addition to many of the issues discussed during the meeting with the Department of Treasury, TEI's delegation discussed IRS's electronic filing mandate for corporate taxpayers, safeguarding the independence of the Appeals Division, Schedule M-3, and the Compliance Assurance Process program with Commissioner Nolan and the other officials. A meeting held after the LMSB liaison meeting IRS with Commissioner Mark Everson addressed the same issues.
The minutes of TEI's liaison meeting with the IRS Large and Mid-Size Business Division are reprinted in this issue, beginning on page 244.
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|Title Annotation:||Recent Activities|
|Date:||May 1, 2006|
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