November 2022 / United States

23 Novembre 2022

IRS Chief Counsel Addresses Treaty Benefits for Distributions from Domestic International Sales Corporations

The Office of Chief Counsel of the US Internal Revenue Service (IRS) issued a memorandum clarifying that foreign taxpayers are not permitted to claim a reduced rate of US tax of their Domestic International Sales Corporation (DISC) distributions under article 10 (Dividends) of an applicable US income tax treaty by taking the position that, pursuant to article 5 (Permanent Establishment), their DISC distributions are not at attributable to a permanent establishment within the United States. The IRS Chief Counsel released the memorandum (AM 2022-005, 4 November 2022) on 18 November 2022.

The DISC regime (sections 991 through 994 of the US Internal Revenue Code (IRC)) was added to the IRC in 1971 to promote exports of domestic goods by deferring corporate taxes on export income. IRC section 991 provides that a DISC is not generally subject to income tax. IRC section 996(g) requires foreign shareholders of a DISC to treat DISC distributions as attributable to a permanent establishment even though they are not so attributable under an applicable US income tax treaty.

US income tax treaties generally provide that, with respect to dividends, the country of residence of a shareholder has the primary right to tax and not the country of source. The country of source is generally limited to taxing a dividend at a reduced rate of 5% or 0% for certain corporate shareholders and 15% in all other cases.

Under article 10(6), however, these benefits do not apply if "the beneficial owner of the dividends, being a resident of a contracting country, carries on business in the other contracting country, of which the payer is a resident, through a permanent establishment situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment."

When foreign taxpayers choose the beneficial DISC regime under the IRC, either directly or indirectly, including as a founding shareholder or as a transferee of the DISC shares, they must forgo article 10 benefits (or any other treaty benefit that does not apply to income attributable to a permanent establishment) with respect to their DISC distributions. The well-established principle of US tax treaties that the IRC and treaty must be applied consistently prohibits foreign shareholders of DISCs from claiming treaty benefits applicable to income that is not attributable to a permanent establishment.

These foreign taxpayers must therefore report their DISC distributions as taxable under IRC section 871(b) or IRC section 882, as applicable.

Furthermore, the IRC and US income tax treaties prevent foreign shareholders of DISCs from claiming treaty benefits on DISC distributions, and thus the "later-in-time" rule codified in IRC section 7852(d) does not apply.

15 Novembre 2022

Government Accountability Office Recommends Congress Establish Guidelines for State Taxation of e-Commerce

On 14 November 2022, the US Government Accountability Office (GAO) published a report (GAO-23-105359) recommending Congress to work with US states to create guidelines for e-commerce businesses navigating the variety of tax requirements among the 50 states.

In 2018, the US Supreme Court held that individual states could collect sales tax from out-of-state businesses absent a physical presence. This resulted in states creating tax requirements that vary across the United States, creating a more complex tax landscape for businesses to navigate.

To evaluate the approaches taken to address the need for a more unified approach of e-commerce taxation among the states, the GAO evaluated reform proposals. While states and multistate organizations have begun the steps towards an incremental approach (e.g. a single state-wide point of registration, filing, administration and auditing), a comprehensive approach (e.g. uniform standards and centralized processes) has not been adopted.

To address the patchwork of tax compliance for e-commerce businesses along with legal disputes that may arise, the GAO suggested Congress use its authority under the Constitution's Commerce Clause to regulate interstate commerce. Furthermore, the GAO provided that the Supreme Court has already stated that Congress has the "ultimate power to resolve" issues with taxation of remote sales.

The GAO suggested Congress use the power to put into place federal legislation which would provide nationwide parameters for state taxation of remote sales. This would help address uncertainties and multistate complexities and improve the overall system.