Summary of the Taxpayer Relief Act of 2012 – H.R. 8: International Tax and Miscellaneous Provisions
This is the third in a series of EisnerAmper LLP Tax Alerts, on the international and miscellaneous provisions of the Taxpayer Relief Act of 2012 (the “Act”). You can view the first alert, on individual income tax, estate and trust provisions here; and the second, on business, real estate, and Hurrican Sandy-related provisions, here.
A. Foreign Investment in Real Property Tax Act (FIRPTA)
The partnership, estate, and trust withholding requirement on gains from the disposition of U.S. real property interests that are passed through to foreign partners is made permanent. The withholding rate is increased from 15% to 20%.
B. Extension of Look-Through Rule of Payments Between Related Controlled Foreign Corporations
The rule which allows for look-through treatment of foreign personal holding company-type payments amongst related controlled foreign corporations has been extended to tax years beginning before January 1, 2014. This rule, which took effect for tax years beginning after December 31, 2005, was set to expire for tax years beginning before January 1, 2012 but is now extended for two years.
C. Extension of Subpart F Exception for Active Financing Income
The active financing income exception from inclusion in Subpart F income is extended to taxable years of foreign corporations beginning before January 1, 2014. This exception allows U.S. shareholders to defer income earned by a controlled foreign corporation from an active insurance business.
D. Capital Gains and Dividends - Observation #1
A new 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold ($400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately)). The 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
The long-term benefit of the IC-DISC (Interest Charge – Domestic International Sales Corporation) export tax incentive had been in question for years 2012 and forward. With the signing of this bill and the finalizing of individual regular and capital gains, rates the continued benefit of the IC-DISC has been established. Under the new law, implementation and utilization of an IC-DISC can result in a 19 percentage point tax saving on a U.S. taxpayer’s export income (export income flowing through to an individual would generally be subject to the highest individual rate of 39.6%, while export income earned through an IC-DISC would be eligible for the 20% capital gains rate) . Use of an IC-DISC can also eliminate the corporate level tax on certain export income.
E. Financial Reporting – Observation #2
As described above and in the related releases, there are many corporate tax provisions in H.R. 8 that are applicable to the 2012 tax year.
Although such provisions will be reflected in 2012 income tax returns when filed, many have questioned the proper tax accounting and reporting for financial statement purposes.
Under ASC 740, the tax accrual should reflect only law enacted by close of the financial reporting period. As such, the implications of the law should NOT be included in your 2012 tax accrual; instead, it will be considered a Q1 2013 event. Note that there will likely be a disclosure requirement in the tax footnote (e.g., early warning disclosure) and/or subsequent events footnote, especially if the effect of the new law is material.