US Tax

U.S. Corporate Tax-related Services

In close collaboration with the New York Office of Deloitte Tax LLP, we provide clients with the most relevant tax consulting and compliance services based on the latest U.S. tax information and developments.

Key services
• Preparation and/or review of U.S. corporate/partnership tax returns
• Assistance for Japanese companies investing in the U.S. with preparing U.S. federal/state corporate tax returns and providing advisory on U.S. federal/state withholding tax
• Support relating to U.S. federal/state tax audits
• General advisory on U.S. corporate tax
• Tax advice for reorganizations
• Tax advice relating to investments in the U.S. (including the application of the Japan-U.S. tax treaty)

FATCA Advisory Services

The U.S. Foreign Account Tax Compliance Act (“FATCA”) requires non-U.S. financial institutions to identify and report U.S. persons among their customer accounts in order to prevent U.S. persons from evading tax through non-U.S. accounts. Financial institutions worldwide are required to fulfill certain obligations to comply with FATCA. In June 2013, an agreement on FATCA between the U.S. Department of the Treasury and relevant Japanese authorities was announced by the Japanese and U.S. governments, requiring Japanese financial institutions to comply with FATCA beginning July 2014.

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U.S. withholding Tax and QI-related Services

Deloitte Tohmatsu Tax Co. and Deloitte Tax LLP provide over a hundred Japanese financial institutions with advisory services relating to the U.S. withholding tax system and qualified intermediary (“QI”) agreements. 

Our QI-specialized team established within the Tokyo Office of Deloitte Tohmatsu Tax Co. offers efficient and detailed technical services in close collaboration with our New York Office of Deloitte Tax LLP in various areas including the following:
• Background of the implementation and an overview of the QI program 
• Features of the QI-related services
• QI training manuals

Implementation and Updates to the QI Regime

On October 14, 1997, the Internal Revenue Service (“the IRS”) issued final regulations concerning the withholding of U.S. income tax on certain U.S. source income payments to foreign persons under Sections 1441, 1442 and 1443 of the Internal Revenue Code (“the IRC”). On May 15, 2000, the IRS issued extensive amendments to these final regulations to fundamentally revise these regulations and related provisions. These two releases, i.e., the final regulations released in 1997 and the amendment regulations issued in 2000 (collectively the QI regulations”), represent the outcome of the IRS’s long-term effort to implement practical and effective withholding rules and regulations. The IRS subsequently issued Notice 2001-4 providing guidance regarding the implementation of the QI regulations, with the provisions becoming effective on January 1, 2001. 

Since then, over 200 Japanese companies have entered into QI agreements with the IRS and Japanese investors are subject to U.S. withholding tax under the QI program. This program has been revised several times based on notices issued since the start of this program in 2001 and currently is more detailed and specific as a result of these revisions.

The new QI program integrating FATCA requirements came into effect with FATCA on July 1, 2014, and introduced modified requirements for compliance moving forward.

Effective dates of QI regulations
The QI regulations are applicable to payments made after December 31, 2000. With FATCA taking effect July 1, 2014, the revised new QI regulations also went into effect.

Key objectives of the QI regulations
• To prevent U.S. residents from evading tax through roundtrip investments
• To prevent residents of countries with which the U.S. has not entered into tax treaties from taking advantage of reduced tax rates by disguising themselves as residents of countries with which the U.S. has signed tax treaties. 

Withholding obligations
In general, the QI regulations obligate persons who make payments of interest, dividends or other FDAP income*2 from U.S. sources to foreign investors to obtain and maintain documentary evidence of the ultimate beneficial owners of these payments. If documentary evidence is not available, the payers must withhold tax on these payments at a rate of 30% or 28%*3 based on the presumption rules.

There were concerns however, that the disclosure of confidential information of account holders by foreign financial institutions to the IRS may breach domestic banking laws of certain countries. To resolve this, the concept of QI was introduced. The QI program allows investors who make investments in the U.S. through foreign financial institutions which have entered into QI agreements with the IRS to be exempt from tax or eligible for reduced rates without disclosing their identities to the tax authorities or withholding agents. Those who are exempt from tax or eligible for reduced tax rates under this program are as follows:
• The ultimate foreign beneficiary providing U.S. withholding agents with appropriate documentary evidence (e.g., Form W-8)
• The ultimate foreign beneficiary investing in the U.S. through QIs

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*1 Foreign Account Tax Compliance Act (“FATCA”): U.S. federal tax law provided for in Chapter 4 of the U.S. Internal Revenue Code for purposes of preventing U.S. persons from evading tax through non-U.S. accounts
*2 Fixed or determinable, annual or periodical income, including various investment income such as interest, dividends, rents and royalties
*3 Recipients who are presumed as foreign persons are taxed at a rate of 30% and those presumed as U.S. persons are taxed at a rate of 28%.

Comprehensive QI-related Services

QI advisory services
• Preparation and electronic filing of IRS forms 1042 and 1042S
• Responding to inquiries from the IRS regarding QI agreements
• Advice on the preparation of Form W-8BEN-E, W-8IMY, withholding statements and other forms submitted to withholding agents
• Advice on general questions concerning QI-related requirements

QI Manual
Foreign financial institutions which have entered into QI agreements with the IRS are required to comply with certain obligations under the QI agreement, educate their employees to ensure that they take appropriate procedures to comply, and maintain QI Manual. In addition, the new QI program that became effective on July 1, 2014 requires each QI to develop a formal "compliance program as a QI" and designate a responsible person for the QI to oversee compliance status as part of the compliance program.    

In addition, QI Manual is required to be regularly updated to reflect the latest provisions and revisions moving forward. 

Assistance for application to become a QI 
• Assistance for entering into QI agreements with the IRS
• Responding to inquiries from the IRS regarding the details of applications 

Development of QI compliance program
• Development of a compliance program for each foreign financial institution based on the draft prepared by Deloitte Tohmatsu Tax.

Other services
• Conduct audit as an external auditor
• Internal audit support
• Notification of mergers, reorganizations, etc., to the IRS
• Termination of QI agreements
• Responding to notices sent from the IRS in the event of a breach of QI agreements 
• Request for tax refunds
• Assistance with the preparation of Forms W-8BEN-E and W-8IMY

QI Manual (Japanese only)

QI Manual – Compliance with new QI agreements integrating FATCA requirements

Published by: Deloitte Tohmatsu Tax Co.
Size: A4
Language: Available only in Japanese
Date of publication: November 2014 
If you wish to purchase the QI Manual, please fill out the contact form below and send it to us. 

Overview
Currently, over 200 Japanese financial institutions have entered into QI agreements with the IRS and are obligated as a QI to perform certain withholding and reporting procedures with respect to their account holders’ investments in the U.S.. QIs are also required to educate their employees to ensure that these employees take the appropriate procedures to comply with the agreements and also to develop a formal compliance program. 

Deloitte Tohmatsu Tax has prepared the latest version of the QI Manual which include examples of completed key forms covering the new QI agreements, specific steps for compliance, and other practical information useful to enhance overall compliance with QI agreements.

Services related to Income from the International Operation of Ships and Aircraft

Section 883 of the Internal Revenue Code (“IRC”) generally provides that qualified income derived by qualified foreign corporations from the international operation of ships or aircraft leaving or bound for the U.S. is reciprocally* excluded from gross income and exempt from U.S. federal income tax by satisfying certain eligibility requirements and reporting obligations. The provisions under this section were revised in 2003 and as a result, both the operators of these ships or aircraft and the owners of bareboat charter ships or dry lease aircraft leaving or bound for the U.S. were obligated to report their status as qualified foreign corporations on Form 1120F every year.
* Reciprocal basis

Deloitte Tohmatsu Tax Co. and Deloitte Tax LLP offer various services regarding these U.S. reporting obligations under Section 883 of the IRC to a diverse range of clients, including trading companies, lease companies and shipping companies.
The specialized team established within the Tokyo Office of Deloitte Tohmatsu Tax Co. provides efficient and detailed technical services in seamless coordination with our New York Office of Deloitte Tax LLP.

Overview
Tax regulations regarding income derived by foreign persons without a business base in the U.S. from the international operation of ships or aircraft were originally established under the Tax Reform Act of 1986 (“TRA”) . Up until then, the scope of income from the international operation of ships or aircraft which was taxable in the U.S. had been unclear and the issue of taxability was frequently argued in court. 

The TRA provides for simple taxation, i.e., 50% of gross income from the international operation of ships or aircraft leaving or bound for the U.S. is considered taxable as U.S. source income and taxed at a rate of 4%. However, Section 883 of the IRC stipulates exemption from tax or reduced tax rates for such income. Specifically, this section provides that if a country allows income derived by U.S. residents from the international operation of ships or aircraft to be exempt from the country’s tax or eligible for a reduced tax rate, the income derived by the country’s residents from such operation is also reciprocally exempt from U.S. tax or eligible for a reduced tax rate. Under this provision, the residents of Japan, Panama, etc., are exempt from U.S. tax for their income from the international operation of ships or aircraft. The number of countries which exempt from tax or apply reduced tax rates to such income derived by U.S. residents has increased by over 60 countries since 1986.
U.S. Department of the Treasury released Treasury Decision (TD) 9087 on August 26, 2003 providing that the final regulations implementing Section 883 of the IRC would become applicable to fiscal years beginning after September 24, 2003, i.e. within 30 days from the release of the TD 9087. Subsequently, the implementation of the regulations was postponed by a year under the American Job Creation Act of 2004 and these regulations finally became applicable to fiscal years beginning after September 24, 2004.

Description of services
We provide the following services for companies which own ships or aircraft leaving or bound for the U.S. in relation to their income from the international operation of these ships or aircraft:

1. Assistance with the preparation of Form 1120F (corporate tax return for foreign corporations)
2. Assistance with the preparation of Form 7004 (form for filing extension) if necessary
3. Assistance with the preparation of the statements as defined in Section 883 of the IRC for information reporting
4. Preparation of draft ownership statements to substantiate compliance with the reporting obligations
5. Handling of notices from the IRS received during the engagement agreement period (one year)