financial assets with contractual cash flows

Financial instruments:
Classification and measurement – the ball continues to roll

Highlights
In May 2012, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) decided that financial assets with contractual cash flows that are solely payments of principal and interest (e.g., plain vanilla bonds) would be classified for fair value through other comprehensive income (FVOCI) classification and measurement at initial recognition if the entity’s business model for a portfolio is both:

  1. to hold to collect contractual cash flows; and
  2. to sell financial assets.

At their meeting on 13 June 2012, the  Boards reaffirmed their previous decision that a debt instrument (such as a loan or a debt security) will be measured at FVOCI only if it passes the contractual cash flow characteristics assessment and the debt instrument is managed within the relevant business model (as described above).

This means that financial assets with contractual cash flows that are not solely payments of principal and interest will not qualify for the FVOCI category and must therefore be measured at fair value through profit or loss (FVTPL).

Furthermore, the IASB tentatively decided to extend the option in IFRS 9 for designating financial assets at FVTPL under the fair value option (FVO) to debt instruments that would otherwise be measured at FVOCI. This means that an entity may, on initial recognition, irrevocably elect to designate a debt instrument at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch.

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Investment funds prevail in French withholding tax case before ECJ

World Tax Advisor:

In a wide-reaching decision, the European Court of Justice (ECJ) ruled on 10 May 2012 that foreign investment funds that invest in French companies should not be liable to withholding tax on dividends. Currently, French investment funds are exempt from French tax on dividends received from a French company, while foreign funds are subject to a 30% withholding tax (25% before 1 January 2012), unless the tax rate is reduced under an applicable tax treaty.

The ECJ held that the discriminatory treatment of dividends paid to foreign investment funds violates the free movement of capital principle under the Treaty on the Functioning of the EU (TFEU) and that the discrimination cannot be justified in either an EU or a third country context. The Court also said there is no reason to apply a temporal limitation on the effects of its decision.

This is a significant victory for investment funds, and the expected cost of the decision to the French tax authorities is in excess of approximately EUR 4 billion. The decision also will have implications for similar challenges against several other EU member states by portfolio investors, such as investment funds, pension funds and charities investing in those other member states.

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SEC Issues Letter on Accounting for OTC Derivatives | KPMG | US

SEC Issues Letter on Accounting for OTC Derivatives | KPMG | US: “
By KPMG LLP | May 17, 2012

This edition of Defining Issues reports that the SEC’s Office of the Chief Accountant recently provided guidance in a letter to the International Swaps and Derivatives Association about whether implementation of certain provisions of the Dodd-Frank Act that relate to over-the-counter derivatives would affect a company’s hedge accounting.

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SEC Issues Letter on Accounting for OTC Derivatives | KPMG | US

SEC Issues Letter on Accounting for OTC Derivatives | KPMG | US: “
By KPMG LLP | May 17, 2012

This edition of Defining Issues reports that the SEC’s Office of the Chief Accountant recently provided guidance in a letter to the International Swaps and Derivatives Association about whether implementation of certain provisions of the Dodd-Frank Act that relate to over-the-counter derivatives would affect a company’s hedge accounting.

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Internal Revenue Bulletin – January 19, 2010 – Rev. Rul. 2010-3

Internal Revenue Bulletin – January 19, 2010 – Rev. Rul. 2010-3

Rev. Rul. 2010-3


Section 1256 contracts market to market. This ruling holds that the London International Financial Futures and Options Exchange (LIFFE), which is a United Kingdom derivatives market, is a qualified board or exchange within the meaning of section 1256(g)(7)(C) of the Code.

ISSUE

Is London International Financial Futures and Options Exchange (“LIFFE”), which is a regulated exchange of the United Kingdom, a qualified board or exchange within the meaning of section 1256(g)(7)(C) of the Internal Revenue Code?

LAW AND ANALYSIS

Section 1256(g)(7) provides that the term “qualified board or exchange” means:
(A) a national securities exchange which is registered with the Securities and Exchange Commission,
(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or
(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of section 1256.

HOLDING

The Internal Revenue Service determines that LIFFE, which is a regulated exchange of the United Kingdom, is a qualified board or exchange within the meaning of section 1256(g)(7)(C).

2012 India budget What you need to know?

Asset Management Tax Alert

The 2012 India Budget has been approved by the President of India on May 28, 2012 and has been enacted into legislation effective April 1, 2012 unless otherwise specified. We have highlighted the important changes below impacting asset managers investing in India.

Taxation of Indirect transfers — retrospective amendment
Gains from transfer of shares or interest in a foreign entity will be taxable in India if the shares/interest derive value substantially from assets located in India (directly or indirectly). The amendment could impact indirect transfers executed in the last seven years considering the statute of limitations. In view of withholding tax provisions, the amendment might affect sellers as well as buyers.Introduction of General Anti Avoidance Rules (“GAAR”)
GAAR has been introduced effective April 1, 2013 primarily to codify the doctrine of substance over form and to deal with aggressive tax planning. GAAR provisions override tax treaties to prevent treaty abuse and bring certain cross border transactions under taxation. Under GAAR, an arrangement can be declared impermissible if it inter alia lacks commercial substance.
Beneficial amendments to capital gains 
The Indian Supreme Court holds that the sale of shares outside of India by Hutch to Vodafone is not liable to tax in India and accordingly Vodafone is not subject to Indian withholding tax obligations. In holding that the indirect transfer of capital assets located in India is not subject to tax in India, the Supreme Court provided guidance on adopting an approach that looks at the entirety of the transaction.

  • Long-term capital gains [for most assets, the holding period is more than twelve months] earned by non-residents on the sale of unlisted securities will be taxed at the lower rate of 10 percent (plus surcharges) instead of the existing rate of 20 percent.
  • Sales of unlisted equity shares in an initial public offering under an offer for sale to the public, will be exempt from capital gains tax effective July 1, 2012 if such shares are held for more than twelve months, and taxed at a concessional rate of 15 percent (plus surcharges) in other cases. Such sales will be liable for a securities transaction tax at 0.20 percent of the sale price, regardless of whether there is a gain.

Condition to avail tax treaty benefits
Tax residency certificates, completed in a prescribed format, will be mandatory for taxpayers seeking to claim treaty benefits, effective as of April 1, 2012.
Take action now
Fund complexes should assess the impact of these developments on their investment activities in India including:

  • An analysis of the structures and treaty provisions in place
  • An analysis of capital gains tax exposure for an open tax year, including any impact on net asset values/capital accounts
  • An analysis of potential capital gains tax due on portfolio positions

Upcoming Dbriefs webcastDbiefs webcast: India’s Finance Act 2012: How Will Its Changes Impact Asset Managers?
June 26, 2012 | 11:00 AM EST
Register now

  • Significant provisions in Finance Act 2012, such as the amendments to source rules (the ”Vodafone provision”), general anti-avoidance rules and changes to capital gains tax regime
  • Use of holding companies and current trends
  • Impact on fund financial statements
  • Foreign tax credit implications

Gain insights and practical guidance so you can assess your foreign investments in India before closing the books this summer. 
For more information, please contact

Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165
edwdougherty@deloitte.com

Tom Butera
Principal
Deloitte Tax LLP
+1 212 436 3231
tbutera@deloitte.com

Deloitte | Regulatory Risk Report | June 15, 2012 | Financial Services

Deloitte | Regulatory Risk Report | June 15, 2012 | Financial Services:

Regulatory Risk Report – June 15, 2012

A convenient compendium of current financial regulatory developments

We are pleased to share the latest issue of the Regulatory Risk Report, a financial services regulatory publication issued twice per month which contains concise summaries of important regulatory developments affecting the global financial industry. This newsletter is published by Reg-Room, LLC, and is made available as a convenient and useful compendium of publically available news on regulatory developments around the world.

Seven topic areas are covered in each issue and comprise international, U.S. banking, U.S. investment, U.S. markets, European Union, United Kingdom, and anti-money laundering (AML) and enforcement.

Please note that individual issues of the Regulatory Risk Report are not archived on Deloitte.com. Rather, the site is refreshed with each new issue as it is published so that the most current regulatory information and developments are always front and center. Please download the current issue for both current and future reference.

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Treatment of Income from Certain Government Bonds for Purposes of the

IRS Notice 2012-45

Passive Foreign Investment Company Rules  

SECTION 1.  PURPOSE
This notice provides guidance regarding the treatment of certain government bonds for purposes of determining whether a foreign corporation is a passive foreign investment company (PFIC).

SECTION 2.  BACKGROUND
 Section 1297(a) provides that a PFIC is any foreign corporation if 75 percent or more of its gross income for the taxable year is passive income or the average percentage of assets held by the corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.  Section 1297(b)(1) provides that passive income means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c), subject to the exceptions of section 1297(b)(2).  Under section 1297(b)(2)(A), the term “passive income” does not include any income derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States or, to the extent provided in regulations, by any other corporation (active banking exception).

In Notice 89-81, 1989-2 C.B. 399, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) described rules that would expand the active banking exception to certain foreign corporations not licensed to do business as a bank in the United States, and identified the types of banking activities that produce income excluded from passive income under the active banking exception.  In 1995, the IRS and the Treasury Department issued proposed regulations on the active banking exception.  Prop. Reg. §1.1296-4.

SECTION 3.  QUALIFYING FOREIGN GOVERNMENT BONDS HELD BY ACTIVE BANKS
 Recent economic conditions have resulted in a shift in the assets held by some non-U.S. financial institutions.  As a result of these conditions, certain financial institutions are holding government bonds at higher than historical levels.  These increased levels have raised an issue concerning the treatment of these financial institutions, and specifically the treatment of government bonds, under the PFIC rules.  
 This notice announces that, solely for purposes of section 1297 and the taxable years provided in Section 4 of this notice, the income from Qualifying Government Bonds held by an Active Bank qualifies for the active banking exception.

For purposes of this notice, the following terms have the meanings set forth below:
Active Bank.  For any taxable year set forth in Section 4 of this notice, an Active Bank is a foreign corporation that:

  1. would not be a PFIC for such taxable year as a result of the application of the active banking exception if the treatment of Qualifying Government Bonds described in this Section 3 applied (and taking into account, if applicable, section 1297(c)); 
  2. was not in any prior taxable year beginning in the preceding five calendar years a PFIC, in each case as a result of the application of the active banking exception (taking into account, if applicable, the treatment of Qualifying Government Bonds described in this Section 3 for taxable years set forth in Section 4 of this notice and section 1297(c)); and 
  3. is, and was in each taxable year beginning in the preceding five calendar years, a publicly traded corporation.  For purposes of this notice, a corporation will be treated as a publicly traded corporation if (1) one or more classes of stock is regularly traded on a qualified exchange or other market (within the meaning of §1.1296-2), or (2) at least 50 percent of the aggregate vote and value of the shares in the corporation is owned directly or indirectly by another corporation described in clause (1) of this subparagraph.  

Qualifying Government Bond.  Qualifying Government Bond means a bond or similar instrument that has been issued by the government of the country (or any political subdivision, agency, instrumentality, or local authority thereof) under the laws of which the Active Bank is created or organized.

SECTION 4.  EFFECTIVE/APPLICABILITY DATE
 This notice shall apply to taxable years of foreign corporations beginning in 2011, 2012, and 2013.  

SECTION 5.  DRAFTING INFORMATION
 The principal author of this notice is Kristine Crabtree of the Office of Associate Chief Counsel (International).  However, other personnel from the IRS and the Treasury Department participated in its development.  For further information regarding this notice, contact Ms. Crabtree at (202) 622-3840 (not a toll-free call).

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Singapore tax authorities clarify nontaxation of companies’ gains on disposal of equity investment

World Tax Advisor:

The Inland Revenue Authority of Singapore (IRAS) published capital gains safe harbor rules in a Circular dated 30 May 2012. The rules, which are designed to provide certainty on the income tax treatment of gains from the disposal of equity investments, were presaged in the 2012 budget speech given by the Minister for Finance.

Singapore currently does not tax capital gains. If a gain is regarded as a capital gain, it will not be subject to income tax. Conversely, if a gain is regarded as a revenue gain, it will be subject to income tax if it is Singapore sourced or, if it is foreign sourced, the gain is received or deemed to be received in Singapore.”

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Net Capital Gains as Investment Income

IRS Private Letter Ruling 201213008

This is in response to your letter requesting permission to revoke an election made by Trust pursuant to § 1.163(d)-1(c) of the Income Tax Regulations to treat net capital gain income as investment income under §§ 163(d)(1) and 163(d)(4)(B) of the Internal Revenue Code for Year 1.

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