Tag Archives: Port Manatee

The U.S.-Japan Income Tax Treaty

Japan has long been one of the United States’ largest trading partners.  Japan is also one of the United States’ longest-standing tax treaty partners.  The first U.S.-Japan income tax treaty was concluded in 1954.  Updated treaties were signed in 1971 and 2003, and a protocol in 2013 further modernized the treaty.  The U.S.-Japan income tax treaty largely follows the model tax convention published by the Organisation for Economic Co-operation and Development (OECD), of which both countries are members.

The U.S.-Japan income tax treaty helps reduce the incidence of double taxation and encourages the cross-border movement of people and goods.  In general, the tax treaty allocates or restricts taxing rights between the two countries so that a resident of either the United States or Japan does not pay tax in both countries with respect to the same income (or pays reduced rates of tax in one of the countries).

For example, dividends paid by a company which is a resident of the United States to a resident of Japan may generally be taxed in both Japan and the U.S., but the rate of tax imposed by the United States with respect to such dividends is limited to either 5% or 10% (or, in some circumstances, such tax may be eliminated).  In the case of interest and royalties paid by a resident of one of the countries, only the country in which the recipient of the interest or royalty payment resides may tax such payments.  Similarly, capital gains derived by a resident of the United States or Japan from the sale of property other than real estate are generally taxable only by the country in which the seller of the property resides.  Gains from the sale of real estate and certain real estate holding companies, however, remain taxable in both countries under the tax treaty.

The tax treaty also provides for tie-breaker rules so that the same person is not considered a resident of both countries and provides a limited safe harbor for wages and salaries paid to residents of one country who perform employment services in the other country.  Other provisions relate to the taxation of diplomats, athletes, and branches or “permanent establishments” of multinational businesses, among other special situations.  Where disputes regarding the taxation of cross-border activities arise, notwithstanding the provisions of the treaty, the treaty provides a dispute resolution mechanism whereby the U.S. and Japanese governments can come to a mutual agreement to reduce or eliminate the additional taxation.

Recent U.S.-Japan income tax treaty documents and Treasury Department technical explanations are available at treasury.gov.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

Section 1059A – A Trap for the Unwary?

Our community is near multiple major ports, including Port Manatee and the Port of Tampa.  Taxpayers that import goods through these ports should be aware of U.S. tax issues that can arise from their actions.  U.S. taxpayers that import goods from related parties outside the United States have several tax rules to consider in setting their transfer prices and reporting income, including the transfer pricing regimes in both the importing and exporting jurisdictions.  Among the U.S. tax rules that such importers must consider is a lesser-known Internal Revenue Code section, Section 1059A.

Section 1059A provides that the maximum amount a U.S. taxpayer may claim as basis in inventory goods imported from a related party is the amount that was determined for customs purposes when the goods were imported.  The statute is designed to prevent taxpayers from claiming low values for customs purposes (reducing the amount of U.S. customs duties owed) and high values for transfer pricing purposes (reducing the amount of U.S. taxable income).

A trap for the unwary can occur when related parties retroactively modify their intercompany pricing after goods are imported.  For example, a U.S. company may increase the amount paid for an imported good at the end of the year in order to satisfy the arm’s length standard for transfer pricing purposes.  This additional amount is generally be subject to customs duties, but reporting additional customs duties can fall through the cracks if a company’s personnel responsible for tax and customs compliance do not communicate regarding the adjustment.  In addition, even where additional amounts are reported for customs purposes, the timing of an upward adjustment in the customs price could prevent taxpayers from including the adjustment in the basis of the inventory for tax purposes if the adjustment is made after the customs value has been “finally-determined” (generally, 314 days after the date of entry).  These issues may frequently arise when taxpayers retroactively adjust transfer prices in accordance with Advance Pricing Agreements.

In recent years, practitioners have called for better coordination between the Internal Revenue Service and U.S. Customs and Border Protection along with reforms to eliminate the potential whipsaw of Section 1059A.  It remains to be seen whether current tax reform proposals will reach this issue.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563