United States

Tax accounting

The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) addresses financial accounting and reporting matters under US Generally Accepted Accounting Principles (US GAAP). ASC 740, Income Taxes, addresses how companies should account for and report the effects of taxes based on income.

Financial statements of US Securities and Exchange Commission (SEC) registrants are required to be prepared in accordance with US GAAP. Foreign private issuers may include in their filings with the SEC financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) without reconciliation to US GAAP.

Corporate reorganisations

In general, a corporate reorganisation involving a merger, acquisition, or consolidation is a taxable event under the general recognition provisions of the Code. However, a corporate reorganisation that meets certain statutory and judicial requirements may qualify as a tax-free transaction, with gain or loss generally not recognised at the corporate or shareholder levels. In those cases, gains and losses are deferred to a later date through carryover basis and holding period mechanisms.

Foreign Account Tax Compliance Act (FATCA)

FATCA was enacted in 2010 to prevent and detect offshore tax evasion by US persons. FATCA seeks to compel disclosure of US persons' ownership of foreign accounts, interests, and assets. While the name may imply that FATCA is directed at financial institutions, many global companies outside the financial services industry may be affected if they have entities in their worldwide network falling under the purview of FATCA, or have operational areas that make or receive payments subject to FATCA.

Multinational enterprises that are withholding agents were already obligated to report, withhold, and document payees, but FATCA requires changes to these activities. FATCA mandates that multinational businesses evaluate entity payees differently, engage in withholding on certain gross US-source payments, as well as report different information to the IRS. Payee identification applies both to entities within the enterprise and to third parties. Prior to opening financial accounts, financial institutions will require FATCA classification information. As a result, MNEs should document the FATCA classification of all entities that own a financial account; this will reduce delays in opening accounts and prevent unnecessary withholding.

Note that proposed regulations eliminate the obligation to impose FATCA withholding on gross proceeds from the sale of assets that produce US-source interest or dividends. Treasury and the IRS cite complexity and the impact of FATCA Intergovernmental Agreements (IGAs) on compliance as reducing the need to impose withholding on gross proceeds. Withholding agents are permitted to rely on the proposed regulations immediately (Reg-132881-17 published December 2018). Note that part of those regulations were finalised in TD 9890, 2 January 2020.

The withholding provisions of FATCA began 1 July 2014. Compliance with FATCA required many organisations to make changes to existing systems and processes across business units and regions, policies and day-to-day practices, and new tasks, such as registering with the IRS.

To mitigate certain foreign legal impediments to FATCA compliance, IGAs were negotiated between the US Treasury and foreign governments. Under certain IGAs, information will be exchanged directly between the IRS and local governments. This obligates financial institutions in IGA jurisdictions to report information to their government that may not have been required or permitted in the past. The local governments then share this information with the IRS, and, in exchange, the IRS shares certain banking information with the participating jurisdictions.

Assessing FATCA’s impact will require identifying whether an IGA applies to the entity or payment stream at issue. Provisions in the final FATCA regulations or, if applicable, an IGA that provides more favourable results may be utilised. IGAs have increased the complexity of the process, due in part to the multiple paths to compliance (e.g. regulations or an IGA). The regulators have focused on having consistent requirements in each IGA, but there are noticeable differences in the agreements.

Common Reporting Standard (CRS) and Multilateral Instrument (MLI)

The OECD, on 21 July 2014, released the Standard for Automatic Exchange of Financial Account Information in Tax Matters, including the Commentary on the Common Reporting Standard (CRS). CRS seeks to establish the automatic exchange of tax information as the new global standard. The automatic exchange of information involves the systematic and periodic transmission of extensive taxpayer information from the country in which a taxpayer's financial accounts are located to that taxpayer’s country of residence. As of 30 July 2020, the United States has not adopted the CRS.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (the Multilateral Instrument or MLI) entered into force on 1 July 2018. The MLI covers recommendations from the OECD BEPS project that affect double tax treaties (DTTs). This applies both to various minimum standards and some additional recommendations. The MLI was developed under BEPS Action 15 and encompasses recommendations for Action 2 (hybrid mismatches), Action 6 (treaty abuse), Action 7 (permanent establishments), and Action 14 (dispute resolution). The United States is one of the countries that were part of the post-BEPS discussions on the MLI but have not signed the MLI. These countries, including the United States, will be expected to meet the BEPS minimum standards in alternative ways (e.g. via bilateral agreement or protocol).

US possessions

Puerto Rico, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the US Virgin Islands have their own independent tax departments. Accordingly, they have their own rules. See the Puerto Rico summary for more information about Puerto Rico taxation.