For this week’s in review, we are covering updates and news releases on the CARES act, how China recently imposed a tax on the global income of its citizens, and how the US government released the final version of the export incentive tax rules better known as Foreign Derived Intangible Income (FDII) and their related impact on companies selling Intellectual Property (IP).
Specifically, we will be covering the following this week—
- Reported Errors on PPP Data Released Last Week;
- China Imposes A Tax on the Global Income of its Citizens;
- Export Incentive Tax Rules Become Finalized; and
- A Practitioner’s Insight on How Companies Selling IP Get Narrow Win in Export Incentive Tax Rules
Reported Errors in Recently Released PPP Data Raise Questions About Stimulus
July 13, 2020 – Last week, the US government released data on the recipients of PPP loans in an effort to provide US citizens transparency on to whom and how the reelif and stimulus package provided under the CARES Act was being distributed. Contained in the recently released data was Numerous loan values and jobs retained are incorrect in the data
In an analysis released by Bloomberg News , it showed that Paycheck Protection Program loans totaling more than $521 billion released on July 6 contain many errors or potential oversights on the distribution of the PPP loan. Although the maximum PPP loan for a one-person enterprise is $20,833, more than 75,000 loans listing one job retained have higher amounts — including 154 showing $1 million or more.
In addition to the errors noted above, there were similar anomalties in te data purporting to show the amount of jobs retained. Out of almost 4.9 million loans, the number of “jobs retained” is zero for 554,146 and blank for 324,122. Seven loans list negative job numbers.
The anomalies cast doubts about the accuracy of the data for the centerpiece of the $2.2 trillion relief package enacted in March, including whether it supported the 51.1 million jobs that the administration has touted.
The PPP program is already facing backlash for doling out millions of dollars to big-name law firms, Wall Street managers and companies with ties to President Donald Trump and other politicians. Now critics say the data issues make it difficult to evaluate how well the program worked, especially because the names of borrowers were redacted for smaller loans that account for about 87% of the number of loans.
China Starts Taxing its Citizens for Global Income
July 10, 2020 – China has started tracking down some of its citizens living abroad to collect taxes, surprising expatriates who never had to pay levies back home on overseas income, according to people familiar with the matter.
State-owned enterprises operating in Hong Kong, which has one of the lowest tax rates in the world, told mainland Chinese expats recently to declare their 2019 income so they can pay taxes at home, according to the people, who asked not be named because they aren’t authorized to speak publicly on the matter.
China, which charges taxes of as high as 45%, revised its income tax rules January last year to help authorities start collecting money from its citizens worldwide — similar to what the U.S. does with Americans living abroad. But Beijing only disclosed detailed instructions this year on how to file such taxes, catching many expatriates flat-footed.
The move signals the beginning of what could be a major shake-up for one of the largest expat communities in the world as some could see their tax bills soar. Though specific statistics on expats weren’t immediately available, Chinese state media reported there are about 60 million ethnic Chinese living overseas.
The move could be a big blow for Chinese expats working in places such as Hong Kong, who’ve only had to pay a maximum of 15% of their salaries in taxes. That’s one third of mainland China’s highest tax bracket.
It’s not just paychecks. The rules also subject income from dividends and property sales to taxation back home.
Though Chinese nationals have theoretically been obliged to pay taxes on their global income for many years, it hadn’t been enforced until now.
US Export Incentive Tax Rule Rules Finalized
July 10, 2020 – The IRS and Treasury have finalized rules for a tax break on exported goods and services that offers more flexibility on documentation requirements for obtaining it.
The final regulations, under Section 250 for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), address numerous issues related to a deduction for domestic corporations, including requirements to prove eligibility and computational and ordering rules.
Section 250, established under the 2017 tax law, is meant to encourage manufacturing in the U.S. It provides an deduction equal to the sum of 37.5% of a corporation’s foreign-derived intangible income plus 50% of its global intangible low-taxed income, limited by its taxable income.
The final regulations made make substantive changes to documentation requirements in response to comments received on rules proposed in March of 2019.
The rules remove the specific documentation requirements for establishing a foreign person status, foreign use with respect to sales of general property directly to end users, and the location of consumers of that general property.
The rules also relax the documentation requirements for establishing foreign use for sales of general property to non-end users and for sales of intangible property, and for determining if services are performed for business recipients located outside the U.S. For these transactions, the specific documentation requirements are replaced with more flexible substantiation rules.
The final regulations will generally apply for taxable years beginning on or after Jan. 1, 2021. However, taxpayers may choose to apply the final regulations for taxable years beginning on or after Jan. 1, 2018.
Practitioner Insight: Companies Selling IP Get Narrow Win in Export Incentive Tax Rules
July 10, 2020 – The IRS and US Treasury released final rules covering export tax incentives for manufacturing companies here in the US.
The export tax incentive is meant to offset a tax on a new category of foreign income—global intangible low-taxed income (GILTI)—and encourage companies to manufacture in the U.S. and sell goods and services for foreign use.
As part of the recent release, a new rule was added that makes it easier for US based companies selling certain IP overseas to claim the deduction provided under Section 250.
The IRS said that certain types of IP transactions don’t have to undergo the typically onerous process for verifying that the final product is being used abroad. The guidance only applies to IP that is used to tell a manufacturer how to produce a particular result, such as a patent.
All sales of IP will need to be substantiated in order to qualify for the deduction, practitioners said, though different kinds of IP sales are subject to different substantiation rules. This will require the taxpayer to either look at the purchaser or the ultimate end user depending upon the method chosen.
The IP transactions that do require the additional step of tracking an end user have different treatments depending on payment method.
Foreign income in the form of lump sum payments and royalties are also treated differently under the final rules and require different substantiation methods, practitioners said.
Royalty payments that qualify for the deduction must be substantiated using information from overseas purchasers, which can be difficult to obtain. Lump-sum payments require subjective projections of foreign use.
While companies will have to determine how they will need to trace the ultimate use of their IP after being sold, and consider the method they are being paid, the take-away from this release is that companies now selling IP have certainty they qualify for this US export tax incentive.