August 2020 / United States

On 30 July 2020, the Swiss Ministry of Finance published a mutual agreement, signed by Switzerland on 28 July 2020 and by the United States on 23 July 2020, respectively, on mandatory binding arbitration under article 25(6) and (7) of the Switzerland - United States Income Tax Treaty (1996), as amended by the 2009 protocol and exchange of notes.   Cases eligible for arbitration The cases eligible for arbitration are:

• cases in which no agreement under a mutual agreement can be reached, generally, within 2 years and all conditions for starting an arbitration procedure are satisfied; and
• unresolved bilateral Advance Pricing Agreement (APA) requests.

Cases not eligible for arbitration The cases not eligible for arbitration are:

• cases not accepted by a competent authority or cases where no assistance is provided to a taxpayer because the procedural requirements are not met;
• cases which are deemed not to be suitable for arbitration by the competent authorities; and
• cases solved by a decision of a Court or Administrative Tribunal.

Interested parties have to decide within 30 days whether or not they agree with the outcome of the arbitration procedure. For the full text of the Memorandum of Understanding, see here.

The US Treasury Department and Internal Revenue Service (IRS) have corrected errors in final regulations on property transfers and stock distributions in cross-border reorganizations. The corrections regard, in particular, the treatment of transfers of stock or securities to foreign corporations in outbound transactions. The final regulations (TD 9614) that are the subject of this correction were issued in 2013 under section 367 of the US Internal Revenue Code. The corrections were published in the Federal Register on 20 August 2020 (85 FR 51346) and are effective on that date.

The US Internal Revenue Service (IRS) has released guidance on the taxability of distributions from S corporations with no accumulated earnings and profits (AE&P). The guidance also addresses the items to consider to determine the taxability of non-dividend distributions, liquidating distributions, and sale-or-exchange redemption distributions. S corporations are small business corporations that are generally treated as flow-through entities under the US Internal Revenue Code (IRC). They are required to be organized as US domestic corporations and are not permitted to have non-resident shareholders or shareholders who are not individuals. Under IRC section 1368, all distributions made by an S corporation without AE&P, and non-dividend distributions, are non-taxable up to the shareholder's stock basis. Distributions exceeding the shareholder's stock basis are taxed as gain from the sale or exchange of property (generally capital gain). The IRS notes in its guidance that an S corporation will only have earnings and profits (E&P) if it was formerly a C corporation, i.e. a regular business corporation under the IRC, that converted to S status, or if the S corporation acquired assets from a C corporation in certain types of transactions. The guidance is in the form of a Practice Unit, and was released on 19 August 2020. It bears a Document Control Number of SCO-T-007 and indicates a date of last update of 29 June 2020. Practice Units are issued by the Large Business and International (LB&I) division of the IRS for the purpose of internal staff training. The document states that it is not an official pronouncement of law, and cannot be used, cited or relied upon as such.

US President Trump has ordered that the employee share of payroll taxes should be deferred until the end of the year. President Trump has directed the Secretary of the US Treasury to take the necessary steps to defer the withholding, deposit, and payment of the employee share of payroll taxes (i.e. the 6.20% FICA tax) from 1 September 2020 until the end of the year, as a further response to the economic impact of the COVID-19 pandemic. The deferral would be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than USD 4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. The Treasury Department is expected to issue guidance to implement the measure. In addition, the Treasury Department has been directed to explore avenues, including Congressional legislation, to forgive the taxes deferred. This Presidential order follows measures enacted under the CARES Act that permit deferral of the employer share of payroll taxes for the period beginning on 27 March 2020 and ending on 31 December 2020.

Employers can set up a leave-sharing plan that permits employees to deposit leave in a "leave bank" for use by other employees who have been adversely affected by the COVID-19 pandemic. This will have no tax consequences for an employee who deposits leave but the employee will also not be able to claim a deduction for the deposited leave. The US Internal Revenue Service (IRS) has clarified the above in guidance in the form of frequently asked questions (FAQs). The FAQs refer to Notice 2006-59 that provides guidance on the federal tax consequences of certain leave-sharing plans as well as the requirements of a qualifying leave-sharing plan. The FAQs specifically provide that an employee who deposits leave in the leave-sharing plan need not include the deposited leave in income or wages. The FAQs indicate a last reviewed or updated date of 3 August 2020.

The US Internal Revenue Service (IRS) has provided further clarification on deferring employment tax deposits, under rules introduced in the CARES Act to address the economic impact of the COVID-19 pandemic. The guidance is in the form of frequently asked questions (FAQs). The CARES Act permits deferral of payroll tax for the period beginning on 27 March 2020 and ending on 31 December 2020. The FAQs note that deposits can be deferred by reducing required deposits or payments for the relevant period, less credits against the employer's share of social security tax. The new guidance also explains how to report deferrals, how deferral works for employers that file annual employment tax returns, timing issues, the interaction with the "next-day deposit" rule, deferral by third-party payers, and certain other technical aspects.