08.08.11

Multistate Companies Could Face SEC Penalties for Sales Tax Issues

Multistate corporations now not only have to worry about state revenue departments with their state sales tax compliance issues, but also the Securities and Exchange Commission (“SEC”).  On January 10, 2011, In the Matter of Hudson Highland Group, Inc., the SEC issued an Order against Hudson Highland Group, Inc. (“Hudson”) for its failure to “consistently comply with tax laws that required it to collect taxes from its customers, and to remit them to the taxing jurisdictions as their fiduciary.”

Beginning in 2003, when Hudson spun off from Monster Worldwide, Inc., their in-house tax staff was concerned about Hudson’s inadequate accounting software.  Particularly, this software did not automatically apply the varying state sales tax rates, which resulted in Hudson not collecting and remitting the proper amount of tax.  It also did not track where sales were executed, thus sales tax collections were remitted to the wrong jurisdictions.  Finally, the software did not note which customers had “direct pay” permits and those who had exemptions from states sales tax.  Because of Hudson’s incomplete records and high staff turnover, they did not rectify this issue until 2008.  As a result, Hudson paid nearly $3.9 million to various states to settle their outstanding sales tax liabilities from 2001 to 2007.    

Additionally, the SEC instituted proceedings against Hudson for inability to timely remit sales tax.  Ultimately, the SEC found that Hudson violated Sections 13(b)(2)(A) of the Securities and Exchange Act of 1934 because they failed to devise and maintain a system to properly track its sales tax liabilities in accordance with generally accepted accounting principles.  Also, Hudson violated Section 13(b)(2)(B) because its books and records did not accurately reflect its tax liabilities.  Consequently, Hudson agreed to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A), (B) and to pay a $200,000 penalty.

Multistate companies who have registered with the SEC or are required to register with the SEC need to be aware that similar failures to comply with state sales tax laws could result in proceedings with the SEC.

Should you have any questions about how these tax law changes might affect you, please contact Mike Fletcher at mfletcher@argy.com or 703-770-0533.

IRS Issues Final Regulations on Artificially-Generated Foreign Tax Credits Issues

On July 13, 2011 the IRS released final regulations on what foreign payments are compulsory and thus creditable.  Specifically, the regulations disallow foreign tax credits created by certain highly structured passive investment arrangements (hereinafter referred to as SPIAs), which are intentionally structured to create a foreign tax liability in a situation where the business transaction generally would result in significantly less, or possibly no, foreign taxes.  The final regulations are derived from temporary regulations.  If the structure is considered a SPIA any amounts paid to a foreign jurisdiction will not generate foreign tax credit.  The regulations set out the following six conditions, which if met, will result in the arrangement’s classification as a SPIA.

1. Special Purpose Vehicle (SPV)  – (i) The arrangement has an entity that has substantially all of its gross income made up of passive investment income and substantially of its assets are held to produce such passive investment income ; and (ii) there must be a foreign payment attributable to the income of the entity.
2. U.S. Party  - A person would be eligible to claim a credit under section 901(a) for all or a portion of the foreign payment was an amount of tax paid.
3. Direct Investment  - The U.S. party’s proportionate share of the foreign payment is, substantially greater than the amount of credits that the U.S. party reasonably would expect to be eligible to claim under section 901(a) for foreign taxes attributable to income generated by the U.S. party’s proportionate share of the assets owned by the SPV if the U.S. party directly owned such assets.
4. Foreign Tax Benefit  - The arrangement is reasonably expected to result in a tax benefit to a counterparty under the laws of a foreign country. 
5. Counterparty  - The arrangement includes  a person that under the tax laws of a foreign country, to which the person is subject to, on the basis of place of management, place of incorporation or similar criterion directly or indirectly owns or acquires equity interest in, or assets of, the SPV.
6. Inconsistent Treatment - The U.S. and an applicable foreign country treat the arrangement inconsistently under their respective tax systems, and that the U.S. treatment results in either materially less income or a materially greater amount of FTCs than would be available if the foreign law controlled the U.S. tax treatment.Entities with arrangements that may come under these new regulations should carefully consider their applicability and the impact of losing foreign tax credits will have on the corporation’s overall effective tax rate.

Should you have any questions about how this development might affect you, please contact Darren Mills at dmills@argy.com or 703-770-0542.

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