The Digital Economy is So Taxing

– By Stephen Díaz Gavin and Claudio Palmieri

Economic activity is not only transnational, but increasingly digital.   A business is physically located in one country, sells goods or services in another country and then declares its profits in yet a third country?  Who is the taxing authority? Where is the transaction taxed and to which government do taxes get paid? This has never been a simple question internationally, but in today’s digital world, where borderless transactions are more frequent and more common, the leaders of the G-20 countries, in the Summit declaration of 18-19 June 2012 in Mexico, decried the consequences of these developments — tax base erosion and profit shifting to lower-tax jurisdictions.  Even the proposed U.S. tax reform currently before the U.S. Congress addresses concerns about tax base erosion.

In 2013 the Organization of Economic Cooperation and Development (“OECD”) began a project to combat tax base erosion and profit shifting and the first action item of their Final Report of 2015 concludes the digital economy cannot be considered separate from the rest of the economy for tax purposes – it is increasingly becoming the economy itself.   Significantly, the OECD believes solutions lie not so much in creating new rules, but adapting existing regulations to address the new, digital environment.  Meanwhile, the European Union and some countries in Europe are making their own provisions for dealing with changes caused by the digital economy. With its Communication of September 2017, A Fair and Efficient Tax System in the European Union for the Digital Single Market, the European Commission (“EC”) announced a legislative proposal for the Digital Single Market in Europe, that is intended to be available for implementation if an adequate, ready and preferably international solution inside the G-20/OECD project framework is not implemented.  The two main policy challenges addressed by the EC are: (1) where to tax digital services provided by companies with little or no physical presence and (2) what is taxable (e.g., the value created by intangible assets, data and knowledge).  While a long term approach is favored, the EC is focused on short term measures to address some of these problems quickly such as a tax on untaxed or insufficiently taxed income generated from internet-based business activities (whether creditable against the corporate income tax or as a separate tax); a standalone gross-basis withholding tax on certain payments made to non-resident providers of goods and services ordered online; a levy on revenues generated from the provision of digital services or advertising activity.

In addition to European-wide solutions, some individual countries are also attempting to address the taxation of the digital economy.  For example, in September 2016, a bill was introduced before the Italian Parliament regarding tax measures applicable to competition in digital commercial activities (DDL S.2526 “Misure in materia fiscale per la concorrenza nell’economia digitale” del 10 novembre 2016).  The bill would not only reinforce the powers of Agenzia delle Entrate, the Italian governmental agency which collects taxes and revenue, but would introduce a “hidden permanent establishment” (“stabile organizzazione occulta”) concept which would consider revenues generated from certain types of international transactions, as income generated in Italy. For example, fees paid to non-Italian companies by Italian consumers for the purchase of software licenses distributed on the Italian market. Thus, if a U.S. company engages in online business regularly, with greater than 500 transactions in any six-month period and collecting more than € 1 Million in that same period, that company would be considered to have a “hidden permanent establishment” subject to tax by the Italian authorities.  In addition, the proposed Italian 2018 Budget Law (not yet adopted), includes a proposal for a 6% web tax on services provided by nonresident companies and individuals on revenues generated from the sale to Italian residents  of fully “dematerialised services” (e.g., intangible services such as video and audio downloads).

The common theme in these new proposals in the European Union and EU member countries suggests that governments will look increasingly to tax where economic value is delivered.   If your business is part of the digital economy you clearly need to monitor these developments and pay attention to the legislative and regulatory initiatives being considered at the national, regional and multinational levels, especially in Europe, an important market and one which appears to be moving more quickly than other regions of the world.  You can read the full Client Alert on this issue and if you need more information, have questions or would like assistance, the International Practice Group at Rimon, with an office in Rome, is particularly well suited to serve your needs.  Feel free to contact Stephen Díaz Gavin, Partner based in Washington, DC and Rome or Claudio Palmieri, Counsel to Rimon and principal of Studio Legale Palmieri – Rimon Italia,  based in Rome.   Of course, you can always contact me, Joe Rosenbaum, or any of the lawyers at Rimon with whom you regularly work.

 

Missing Children, Genetics & the Law

As I mentioned in my Legal Bytes post a few weeks ago (Forensic DNA and Missing Children: The Legal & Ethical Issues), I had the honor and privilege of being a featured speaker on 25th of May 2017 – International Missing Children’s Day – at this year’s conference for Missing Children and Genetic Identity, organized and chaired by Patrícia Cipriano, President of the Portuguese Association for Missing and Exploited Children [Associaçāo Portuguesa de Crianças Desaparecidas] held at Lusófona University in Lisbon.

Featuring expert investigators, law enforcement, geneticists and forensic scientists, the conference explored how tough police work, forensic science, government legislators, judges and lawyers can work more effectively and cooperatively within and across national borders.  It also reminded us that DNA kits and learning aides for use by parents, coupled with greater educational efforts and more timely reporting, can help save children’s lives and futures.

The conference was attended by notable dignitaries, including Charlie Hedges, Police Expert, Missing Children and European Alert Coordinator for Amber Alert Europe, Professor Maria do Carmo Fonseca, President of the Institute of Molecular Medicine, Professor Maria do Ceu Machado, President of Infarmed, members of Portuguese Assembly of the Republic , senior law enforcement and forensic scientists with closing remarks delivered by His Excellency Dr. Fernando Negrão, a jurist and former Minister of Social Security, Family and Children, Minister of Justice, director general of the Judicial Police and chairman of the Board of Directors of the Institute of Drugs and Drug Addiction.

The conference highlighted the work being done in Portugal and, of course, the work that still needs to be done.  You can read and download the Conference Agenda & Brochure (Lisbon, PT) and feel free to take a look at my presentation Missing Children – Missing Opportunities, Legal Obstacles in our DNA (Rosenbaum) right here on Legal Bytes.

As always, f you would like to know more about this post, the conference, or the topics discussed at the conference, feel free to contact me, Joe Rosenbaum.

 

 

US Treasury Regulation Changes Could Impact Foreign Owned Single Member LLCs

Melinda Fellner Bramwit, Partner, Rimon, P.C.

Changes to US Treasury Regulations Under Section 6038 of the Internal Revenue Code could affect filings for single member LLCs owned by non-US individuals or entities.

Many non-resident individuals and non-resident entities maintain title to real estate and other assets in single member limited liability companies incorporated under state law in the United States, for a variety of reasons.  Under Federal tax law, such an entity is disregarded for tax purposes unless the owner elects otherwise.  From a corporate perspective, these limited liability companies can be used to harness assets in an entity separate from the owner, providing a layer of corporate protection and perhaps anonymity for the ultimate owner.  These entities are also reasonably simple to form and maintain.

Changes to U.S. Treasury Regulations effective December 13, 2016, throw a wrinkle into the use of this malleable entity in some circumstances, which can be managed with some planning.

These changes require that a non-resident owning 100% of a United States limited liability company (“LLC”) file a Form 5472, an information return, when certain transactions occur between certain parties (“related” parties) and the LLC.

The following example from the regulations illustrates a scenario where this filing would be triggered:

In year 1, F, a foreign corporation forms and contributes assets to US-LLC, a U.S. limited liability company that is a disregarded entity for US Federal tax purposes.  In year 2, F contributes funds to US-LLC, and in year 3, US-LLC makes a payment to F.

Under the modified regulations, F’s payment to US-LLC as well as US-LLC’s payment back to F are both reportable transactions for which a Form 5472 would be required with respect to US-LLC.

This is a simple, yet common situation which triggers the filing requirement. It is important to note that this requirement is applicable to tax years of entities beginning on or after January 1, 2017 and ending on or after December 13, 2017 (Note: This is not a typo. The date is the 13th, not the 31st).  As such, there is a window of opportunity for tax planning to avoid the requirement of this form and if you want to know more or need help, don’t hesitate to contact me, Melinda Fellner Bramwit, a partner here at Rimon, P.C.

Of course, if you need assistance, you may always contact me, Joe Rosenbaum, or any of the lawyers with whom you routinely work at Rimon Law.

US-EU Data Transfer Privacy Shield

Being referred to by the European Union as the most important change in data privacy regulation in 20 years, the new EU General Data Protection Regulation (GDPR) comes into effect on May 25, 2018.  There is even a ‘countdown’ clock on the website and under the GDPR, “Personal Data” means information relating to an identified or identifiable natural person (including email addresses, telephone numbers, addresses and IP addresses).   While the European Commission has determined a number of countries already meet the ‘adequate protection’ test, the United States is not one of them!

As most readers of Legal Bytes already know, personal data cannot be transferred to from the EU to a non-European Union/European Economic Area country, unless that country can ensure “adequate levels of protection” for such personal data.

As background, in July of 2016, a new framework for the movement of personal data between the EU and the US was finalized – EU-U.S. and Swiss-U.S. Privacy Shield Frameworks – which was put into place in an effort to meet the requirements of the EU Data Directive.   However, critics noting the holes in that framework, have generated increasing concern as the 2018 effective date of the new EU GDPR approaches.   A few months ago, immediately following the inauguration ceremony, President Trump issued United States’ Executive Order 13768 (January 25, 2017) that has created even greater concern.  While it is possible a new or refined agreement and framework may be put into place in the months leading up to 2018, there is no certainty.

What do you need to know? What should you consider doing now?   My colleague Jill Williamson has written an article which has been published in Risk & Compliance Magazine, entitled “The Fragile Framework of the Privacy Shield“.   If you want to know more about the privacy and data protection implications of the new framework, its potential risks to your business and what you should be considering as you look to the future, feel free to contact Jill Williamson directly.  Of course, you can always contact me, Joe Rosenbaum, or any of the Rimon lawyers with whom you regularly work.

FCC Opens Radio and Television Broadcasting to Foreign Entities

by Stephen Díaz Gavin

For more than 80 years, Section 310(b) of the Communications Act of 1934 has been interpreted as prohibiting direct foreign ownership of more than 20% and indirect ownership of 25% or more of US radio and television broadcast stations.  Effective January 31, 2017, this will change as the Federal Communications Commission (“FCC”) has removed longstanding prohibitions against these limitations on foreign ownership, although it has preserved the right, on a case-by-case basis, to block a foreign acquisition of a broadcast license in excess of 25% (e.g., for reasons of national security).

Foreign entities, for quite some time, have already been permitted to acquire control over non-broadcast licenses (e.g., nationwide cell carrier T-Mobile is majority owned by Deutsche Telekom). But the FCC has steadfastly enforced its longstanding foreign ownership control policies over broadcast station licenses.  Most famously, Rupert Murdoch had to become a U.S. citizen before being able to acquire control over what we know today as Fox Broadcasting.

Changes adopted to the rules of the FCC will enable approval of up to and including 100% aggregate foreign beneficial ownership (voting and/or equity) by foreign investors in the controlling U.S. parent of a broadcast licensee, subject to certain conditions.  The revised rules, which newly define and in certain respects create different rules for “named” and “un-named” investors, they will allow a named foreign investor that acquires less than 100% to increase its controlling interest to 100% at some time in the future.  If a named foreign investor acquires a “noncontrolling” interest, that investor will now be permitted to increase its voting and/or equity interest up to and including a “noncontrolling” interest of 49.99% in the future, if it chooses to do so.

Although the FCC’s expansive “public interest standard” in approving sales and investments in broadcast licenses, coupled with input from other Executive government agencies, could significantly delay or block investments from some countries, the strong support of this initiative by the remaining Republican members of the FCC would tend to indicate the FCC will be disposed to allow most transactions to proceed to closing.  Indeed, the FCC has already signaled its willingness to do so, by approving just such a foreign ownership acquisition in a recent declaratory ruling issued even before the new rules take effect, ending a decades long back-and-forth haggling over Mexican ownership of Univision.

For more information regarding the new FCC rules or assistance in handling the regulatory and transactional aspects of such an investment, contact the author, Stephen Díaz Gavin, or Phil Quatrini or Sandy Sterrett, all partners at Rimon, P.C.

Of course, you can always contact me, Joe Rosenbaum, the Editor!

Legal Bytes – A New Beginning

A long time ago in a galaxy far, far away……  oops, wrong beginning.

Welcome to the new Legal Bytes blog.  As many of you know, my Legal Bytes blog has been dormant after my recent transition to Rimon, P.C..  Getting set up, ensuring smooth transitions for clients, enhancing the look and feel of the blog has taken a longer than I hoped, but hopefully the bugs are out of the system and it’s now up to me to try my best to make the new Legal Bytes blog worth the wait.  For newcomers, buckle your seatbelts – this isn’t your ordinary legal blog!

What happened? Why does it matter? How does or could it affect you?  Inquiring minds always want to know and in the process of trying to answer those questions for you, I will always try to illuminate and perhaps also entertain you.   In the coming months I’ll entice you into regular readership, enlighten you with timely content, addict you with my trivia contests, entice you to keep in touch and most of all, try to help you better understand how developments in the law and regulation may affect you.

I intend to continue Light Bytes, with interesting quotes and sayings that pique my interest and hopefully yours.  Of course, there was never a question about my trivia contests. After all, who else but a lawyer could call it “Useless But Compelling Facts”?  We have once again made arrangements with the International Law Office (ILO) based in London. I am privileged to have been re-appointed as Editor and exclusive content coordinator for their U.S. Media, Marketing, Sports & Entertainment Newsletter.  Although there will be content you will see exclusively in the ILO newsletter, you may also see many of our Legal Bytes articles re-purposed and ‘internationalized’ in collaboration with much appreciated work of the ILO editorial staff.  I am again excited to be working with such a valued organization and truly great people – shout out to Carolyn Boyle, my Editorial contact.

Want to know what’s on my radar for the year ahead – I won’t spoil all the surprises, drone on about drones, nor will I keep my head in the clouds or the crowds.  I am fascinated by the legal implications of the Internet with Things (yes, I replaced ‘Of’ with “With”).  I’m also concerned about cybersecurity and data protection.   I am intrigued by the growing robustness of augmented reality, which means I don’t have to walk around with those funny goggles or a digital scuba mask to experience the virtual world.  Mobile technology is transforming our world – making digital content, e-commerce and communication available to billions of people that had previously never seen a television, had a bank account or used a telephone.  I would be remiss not to mention social media – maturing and increasingly commercialized – further blurring the distinctions between information, entertainment and advertising; between me as an individual and an employee; between me at play and at work; and between my trademarks and my reputation; and between my insatiable desire to tell the world and my seemingly paradoxical concern over my privacy!

It is a brave new world – so much to know and so much to keep up with.

So stay tuned, and as always, thank you for reading.