United States Tax: US Congress enacts new reporting and withholding requirements for financial institutions

The US Congress enacted so-called jobs legislation that President Obama signed into law on 18 March 2010. The Hiring Incentives to Restore Employment Act provides hiring credits, highway funding, extension of higher small business expensing thresholds, and a Build America Bonds provision.

From an international tax perspective, the legislation is paid for with two revenue offsets: a further delay in the effective date of the worldwide interest allocation
rules until 2021 and modified provisions from the Foreign Account Tax Compliance Act (FATCA).

The FATCA provisions include new reporting and withholding rules imposed on both domestic and foreign financial institutions relating to offshore accounts of US persons. Also included in the legislation is a measure aimed at cross-border equity swaps that would impose withholding tax on certain substitute dividends and dividend equivalent payments received by foreign persons.

The new legislation contains rules that limit the ability of US payers to deduct interest paid on bearer bonds but that include important exceptions that will allow the continued issuance of certain forms of bonds common in the Japanese and some European markets.

Provisions in the legislation imposing substantial new information reporting and withholding tax responsibilities for foreign financial institutions and others are effective in 2013. Other provisions, including measures that impose withholding tax with respect to equity swaps and securities lending transactions are effective more immediately. Ernst & Young LLP – Margie Rollinson (Washington, DC)


US Customs rely on transfer pricing study, APAs

US Customs and Border Protection has issued an internal advice ruling approving related-party pricing supported by a transfer pricing study prepared for Section 482 purposes.

US Customs has previously cautioned importers that relying on a transfer pricing study alone was insufficient to support related-party pricing for customs purposes. Customs acknowledged, however, that a transfer pricing study may nevertheless contain underlying data relevant to the customs assessment. In the recent ruling, Customs reviews the transfer pricing study in detail and explains how it satisfies the Customs standard.

Both the IRS and Customs have to deal with the pricing of imported goods between related parties, and both have their own motivations. The IRS is concerned with the price being too high, thereby reducing taxable income in the United States. Customs is concerned with the price being too low, thus reducing tariff revenue.

While the objective of both income tax transfer pricing rules and customs related party valuation rules is the same – that is, arriving at arm's length prices – the rules are different. As a result, documentation prepared to support income tax transfer pricing is generally not sufficient, in and of itself, to support the customs analysis.

The general position of Customs is that sole reliance on an APA or transfer pricing study to conclude that the transaction value would not be acceptable.

Nevertheless, Customs has issued three valuation rulings that rely upon the information contained in APAs. Customs has also provided guidance in a ruling on the use of a transfer pricing study that used the resale profit method under Section 482 to support the use of transaction value. In this case, the company did not have an APA.

Customs states that there are two important considerations when using a transfer pricing study to support Customs arm's length pricing: 1) comparability between the imported products and the products covered by the transfer pricing study, and 2) the relevant information regarding the "circumstances of the sale" contained in the report and its effect on the methodology selected.

In the end, the relationship between a customs related-party analysis and transfer pricing is complex and evolving. The recent Customs ruling provides welcome guidance on how to use transfer pricing studies to support the valuation of imported goods. It is encouraging to learn that the same fundamental underlying data can be used to support transfer prices for both income tax and customs purposes. Ernst & Young LLP – Bob Ackerman, Dave Canale and Steve Wrappe (Washington, DC)