Category: Tax

Trump Administration Opens the Door to Double-Tax-Rate Penalty on Foreign Companies and Individuals

As part of its “America First Trade Policy,” the White House is exploring an arcane IRS provision that allows the United States to double the tax rates of foreign companies and individuals.
Upon taking office on January 20, 2025, President Trump issued the America First Trade Policy memorandum (the “Order”). The Order broadly lays out various trade-based policy positions, and primarily directs the Secretary of the Treasury, Secretary of Commerce, and other federal agencies to study and promote identified trade policies. While many of these directives call for more general reviews of policy, Section 2(j) of the Order directs the Secretary of the Treasury to examine the implementation of Section 891 of the Internal Revenue Code (the “Code”), an obscure provision that has been a part of the Code for decades.
Section 891 provides that the President may double the tax rates imposed on citizens and corporations of certain foreign countries if the President determines that such countries are subjecting U.S. citizens to “discriminatory or extraterritorial taxes.” As of the drafting of this alert, Section 891 has never been invoked, and therefore there is no authority or guidance providing specific standards or process for the application of this provision. Interpreted liberally, Section 891 allows the President, at his sole discretion, to double the U.S. tax rate for all citizens and corporations from one or more foreign countries. This penalty would apply to foreign taxpayers who are already subject to U.S. taxes.
It is unknown whether President Trump would invoke Section 891, and which country or countries he may target. President Trump, however, has ordered that the United States withdraw from the Organization for Economic Co-operation and Development Global Minimum Tax initiative (“OECD Pillar 2”). If a country adopts Pillar 2 taxes, it may impose a minimum tax on large multinational companies, including U.S. companies. As of the date of this alert, 140 countries have announced the intent to adopt OECD Pillar 2, and numerous countries, including Japan, Korea, Canada, and the majority of the European Union have passed laws implementing the Pillar 2 taxes. If Section 891 were applied against Pillar 2 countries, the number of impacted individuals and corporations could be significant.
It is uncertain whether existing tax treaties may have an impact on the application of Section 891 or whether U.S. citizens with dual citizenship may be subject to Section 891. Individuals or companies with concerns should contact a member of Miller Canfield’s tax team to discuss their specific situation.

What Every Multinational Company Should Know About … Managing Import Risks Under the New Trump Administration (Part III): A 12-Step Plan for Coping with Tariff and Supply Chain Uncertainties

Our previous article on What Every Multinational Company Should Know About … Managing Import Risks Under the New Trump Administration (Part I) identified the 12 main import-related risks (and opportunities) likely to arise in the new Trump administration. Part II laid out the likely roadmap to the international trade priorities of the Trump Administration in The Implications of President Trump’s “America First Trade Memorandum.” We now complete the series on “Managing Import Risks Under the New Trump Administration” with Part III, which provides practical advice regarding how to navigate these potential major changes in the international trade environment.
With potential tariff increases and USMCA renegotiations on the horizon, and with Customs already devoting considerable resources to blocking goods at the border that are the product of forced labor or human trafficking or that violate the Uyghur Forced Labor Prevention Act (UFLPA), we have put together a 12-step guide to preparing for and adapting to the rapidly shifting importing environment. It focuses on the following areas:

Understanding your company’s importing patterns;
Ensuring that your current import efforts comport with Customs requirements and are not leaving your organization at risk for detentions or penalties;
Evaluating the status of your current USMCA compliance efforts;
Risk planning for potential rapid changes in the tariff environment; and
Ensuring your organization is preparing for the likely focus of the new administration on supply chain integrity.

Working through these factors should help most multinational companies with significant international supply chains address the three main risks as we move into the new administration: (1) risks relating to customs underpayments, (2) risks relating to potential tariff hikes, and (3) risks relating to supply chain integrity issues. Because these areas are interrelated, a holistic focus on all five areas listed above is likely to yield the best and most flexible posture to manage a changing international trade landscape.
Understand Your Importing Patterns
Step 1: Identify All Importing Avenues at Your Company. Managing import-related risks begins with a comprehensive understanding of your company’s importing activities. The first step, accordingly, is to get a good handle on your importing patterns by doing the following:

Identify all importer-of-record (IOR) numbers associated with your company at all divisions and subsidiaries.
Identify all customs brokers used by your organization over the last five years, and determine which ones are still active. Determine which types, which product lines, or which divisions each broker is handling.
Pull, or have your customs broker pull, the Automated Commercial Environment (ACE) data with all your company’s identified IORs to gather the data needed to analyze import trends and the accuracy of information submitted to Customs at the time of entry.
Collaborate with procurement teams to anticipate future orders, including for new products, suppliers, and sourcing regions under consideration.
Document all touchpoints in your supply chain, including warehouses, distribution centers, and logistics providers. When paired with importing data, logistics data provides a clear picture of importing patterns, enabling better risk management and modeling.

Ensure Your Imports Are Being Handled with Reasonable Care
Step 2: Ensure Customs Compliance Is Robust. Customs compliance is always important. But in a high-tariff environment, the stakes for missteps are considerably greater, increasing potential penalties and interest for underpayments. For the same reason, the advantages of identifying tariff-saving opportunities are much greater. Some key areas to consider for ongoing customs compliance include:

Ensure Your Company Maintains a Thorough Classification Index to Ensure Proper and Consistent Tariff Coding: Inaccurate classifications can result in incorrect duties or penalties, so confirm your company has procedures to correctly classify goods using the correct Harmonized Tariff Schedule (HTS) codes and maintains a regularly updated import classification index to reflect new products or changes in tariff codes.
Ensure Your Company Maintains a Customs Manual for Consistent Procedures in Importing: Ensure your organization maintains a detailed customs compliance manual that outlines procedures for classification, valuation, origin determination, recordkeeping, interactions with brokers and Customs authorities, and other relevant matters that impact the accuracy of information reported to Customs. A clear, documented import process ensures consistency and reduces the risk of errors.
Ensure Your Company Tracks and Attributes Assists Using a Consistent Methodology: Review and ensure there are procedures to track and properly report assists, royalties, or other costs that might affect the declared value of imported goods. Misreporting these costs could lead to underpayments of duties and penalties.
Ensure Your Company Conducts Regular Post-Entry Audits to Identify Errors in Importation:Ensure there are procedures to regularly review entries after clearance to identify potential errors in valuation, origin declarations, classification, or other entry-specific items that impact how much duties are owed. Do not forget to include areas of tariff savings like duty drawbacks, post-summary corrections, or reconciliation filings to identify and address discrepancies.
Ensure Your Company Maintains Procedures for Overseeing Customs Brokers and Freight Forwarders: Ensure there are written protocols that are consistently followed to ensure there is proper oversight of customs brokers and freight forwarders. Confirm that someone at the company is playing point on this coordination and also has been given ACE access to monitor communications to and from Customs.
Ensure Your Company Maintains Procedures to Monitor Changing Regulations and Importing Requirements: It is important to stay informed about regulatory updates, especially in times when import-related requirements might quickly change. Use tools like ACE data to proactively adjust compliance practices to evolving rules.

Step 3: Address USMCA Compliance. As detailed in Part I, the USMCA is coming up on the deadline for a three-country review, to begin in 2026 (although it is likely that the process will begin earlier). Even in advance of that, we expect Customs to continue prioritizing its review of claims for USMCA preferential treatment, which has been a point of emphasis for CBP over the last few years. Thus, the starting point for USMCA risk planning is to ensure your organization is properly managing its current USMCA posture. Key areas to review include:

Proper Certificates of Origin at Importation: Importers must have a valid certificate of origin to claim duty-free treatment in hand at the time of importation. Lack of documentation at the time of importation may result in denied preferences and cannot be remedied after the fact. This is one of the most common importing errors that we see (along with failure to track assists and misclassifications). Avoid this problem by ensuring certificates are available, complete, and maintained for at least five years. Collaborate with suppliers to provide accurate certificates before shipment.
Compliance with Regional Content Requirements: Products like automobiles must meet specific regional value content thresholds. Conduct a detailed analysis of your supply chain to confirm sourcing meets required content levels.
Proactively Engage with Suppliers: Communicate with suppliers to verify their understanding of regional content requirements and to confirm they are accurately reporting the same to your company. Work with them to resolve discrepancies and improve compliance practices.
Proper Declaration of Country of Origin: Incorrect origin declarations may trigger penalties or loss of USMCA benefits; misclassifications can result in the application of the wrong USMCA classification requirements and also increase scrutiny from CBP. Validate claims of USMCA origin using clear supplier documentation and other supporting information. Ensure employees managing import declarations are trained on proper classification and country of origin rules, which often differ from the normal Customs substantial transformation rules, such as when the USMCA requires a tariff-shift analysis or product-specific requirements.

Step 4: Consider Conducting a Customs Audit. A comprehensive customs audit can be essential for identifying compliance gaps and mitigating risks in an increasingly complex trade environment. Regular audits ensure that your organization adheres to import regulations, minimizes the risk of penalties, and maximizes efficiency in import operations. A well-conducted compliance audit can identify inconsistencies in tariff classifications, valuation, or country-of-origin claims and can streamline processes to avoid unnecessary delays and errors in filings, verify that declared values include all dutiable costs, such as assists and royalties, and ensure your company is maintaining proper documentation. A customs audit also should evaluate the robustness of the importer’s procedures for identifying errors after entry and correcting them using post-entry corrections and protests against liquidation.
Evaluate Tariff-Related Risks
Step 5: Conduct a Comprehensive Risk Assessment. A thorough risk assessment is critical to navigating tariff challenges, geopolitical uncertainties, and supply chain vulnerabilities. This step ensures your business understands where risks lie and enables strategic mitigation measures. Key areas to assess include the following:

Regional Risk: Analyze regions prone to instability, trade disputes, or changing trade agreements. Consider the impact of regional disruptions such as natural disasters or labor unrest.
Political Risk: Evaluate the vulnerability of goods facing political headwinds, especially those from China, Canada, or Mexico.
Product-Related Risk: Identify goods facing high tariff rates or subject to frequent trade policy changes, such as steel and aluminum. Evaluate whether certain products have complex classification issues or are affected by partner agency rules.
USMCA Risk: Evaluate goods from Canada and Mexico that are subject to special rules such as content requirements for automotive goods and heightened rules of origin standards.
Supply-Related Risk: Assess the concentration of suppliers in high-risk regions or for key products. Evaluate supplier compliance with trade regulations and their ability to adapt to policy changes.

Once the data is in place, begin to analyze risk factors. Create risk matrices for products, regions, and suppliers to quantify and prioritize exposures. Also use supply chain mapping to identify the sourcing of key goods, from raw materials to finished products, that the company may not be sourcing directly. Use all data sources to fully understand company sourcing, how goods work through the supply chain, and hidden sources of risk.
Step 6: Model Different Risk Scenarios. The next step is scenario planning. Risk scenario modeling equips your company to anticipate and navigate potential challenges by evaluating various “what if” situations. Risk scenario modeling will help provide visibility into which areas need immediate attention; can provide informed decision making for supplier diversification, tariff mitigation strategies, and contract negotiations; and enhances preparedness to manage disruptions and to maintain compliance while safeguarding profitability. Areas to consider include:

Rising Tariffs on Specific Countries or Goods: Be aware of tariff increases on specific countries or goods such as electronics or steel. Watch for escalation of trade disputes affecting major trading partners like China, Mexico, or the EU.
Adjustments to USMCA Provisions: Track changes to USMCA rules, such as stricter regional content requirements. Be prepared for renegotiations or withdrawal from agreements impacting duty-free access.
Currency and Geo-Political Risks: Currency fluctuations impact the landed cost of goods. Consider the impact of inflationary pressures and potential currency movements on raw materials or finished goods, taking into account the currency used in contractual arrangements.
Long-Term Supply Chain Disruptions: Consider likely increased scrutiny of imports due to UFLPA, forced labor and human trafficking, and other supply chain integrity measures. Evaluate potential long-term disruptions due to geopolitical instability, natural disasters, or pandemics as well as how your company would weather supplier shutdowns due to failure to meet trade or labor standards or for other reasons.
Partner Agency Regulations: Customs acts as the gatekeeper regarding the import-related obligations imposed by several dozen other federal agencies such as the Food & Drug Administration and the Department of Transportation. Failure to meet the requirements of these partner agencies can lead to penalties or detentions of goods at the border. Evaluate whether your organization has identified all potentially applicable partner agency import-related requirements and has taken steps not only to meet these requirements but to document compliance, to allow for a quick response to any detention.

Next, move to modeling scenarios:

Define Scenarios: Collaborate across Procurement, Compliance, and Finance to identify plausible high-impact scenarios such as rising tariffs on key imports, potential filing of antidumping or countervailing duty actions, or revisions to important USMCA preferences. Incorporate external data on policy trends, trade disputes, and economic forecasts.
Quantify Impacts: Calculate financial exposure for each scenario, including additional duties, delays, or penalties. Assess operational impacts such as delays in sourcing or increased compliance burdens.
Develop Response Plans: Create contingency strategies such as diversifying suppliers or renegotiating contracts. Identify alternative sourcing regions with favorable tariff structures, and model how flexibility in supply chains can minimize unexpected international trade developments.

Step 7: Model USMCA Changes. By thoroughly reviewing and modeling current compliance with USMCA, companies can mitigate risks from CBP enforcement. To risk plan for the future and the potential impact of USMCA renegotiations, USMCA modeling should cover the following areas:

Assess Risk of Stricter Rules of Origin: Model scenarios where rules of origin might tighten such as requiring higher percentages of North American content for products like automobiles, machinery, or textiles. Evaluate likely risk points for increased regional content or special rules such as those affecting steel and aluminum. Evaluate whether your existing suppliers and manufacturing processes can meet potential increases in regional content thresholds or how supply chains could adapt.
Anticipate Changes in Sector-Specific Provisions: Monitor developments in sectors like automotive, agriculture, and pharmaceuticals as well as steel, aluminum, and derivative products, which may see targeted updates. Evaluate whether stricter labor or environmental standards could alter sourcing costs and require supplier realignment.
Conduct Supply Chain Reviews: Analyze your supply chain for dependencies on non-USMCA countries that are used as sources of parts and components for USMCA regional production. If rules of origin become more stringent, reliance on these sources might disqualify products from duty-free treatment, thereby increasing costs, so model areas where alternative or secondary suppliers would be prudent.
Prepare for Cost Impact Modeling: Assess how potential changes could affect tariffs, transportation costs, and pricing. Consider consulting trade specialists to evaluate the financial implications of a shift in USMCA provisions.

Implement Tariff-Mitigation Strategies
Step 8: Implement Practical Commercial Strategies. To effectively navigate trade risks and disruptions, companies must adopt pragmatic commercial strategies. These steps aim to strengthen supply chains, ensure continuity, and reduce tariff exposure:

Supplier Diversification: Identify and engage alternative suppliers across various regions to reduce dependency on high-risk countries. Assess supplier capabilities, including production capacity, quality standards, and compliance with trade and labor regulations.
Secondary Sourcing: Establish relationships with secondary suppliers to facilitate rapid transitions if primary sources are disrupted. Prequalify secondary suppliers to ensure readiness for rapid transitions. Develop a database of approved suppliers for critical products to facilitate quick decision making during disruptions.
Proactive Vetting: Use trade fairs, government networks, and supplier databases to vet potential partners. Conduct due diligence on potential suppliers, including labor standards, certifications, and production practices. Consider initiating qualification procedures and measures to ensure potential secondary or alternative suppliers can meet qualification standards.
Safety Stock: Increase inventory for high-priority or tariff-sensitive goods to buffer against supply chain delays or sudden cost spikes. Balance inventory costs with the need for operational flexibility.
Collaboration with Existing Suppliers: Engage in transparent discussions with current suppliers about risks and mitigation strategies. Encourage suppliers to diversify their sourcing of raw materials to prevent cascading disruptions.

Step 9: Review and Update Contracts. Supply chain contracts are pivotal in managing risks associated with tariff volatility and trade disruptions. Regularly revisiting and revising these agreements can provide the flexibility needed to adapt to evolving trade environments. Proactively addressing tariff risks in supply chain contracts reduces financial uncertainty, supports operational continuity, and strengthens relationships with suppliers by fostering transparency and preparedness. Consider the following steps:

Avoid Over-reliance on Force Majeure or Commercial Impracticability Clauses: These legal defenses are often difficult to invoke and generally will not cover tariff-related disputes. Instead, create specific terms addressing trade policy risks, including tariff hikes or supply chain interruptions. Define clear terms to share or distribute the financial impact of tariff increases between the buyer and supplier.
Renegotiate Supply Agreements with Built-in Flexibility for Tariff Increases: Consider implementing proactive contractual arrangements to share in potential increases in tariffs. Where possible, include provisions allowing adjustments for changes in tariff rates. Build in clauses enabling renegotiation or termination in cases of significant trade policy shifts.
Incorporate Alternative Sourcing Requirements: Require suppliers to maintain backup production capabilities or secondary sources to mitigate disruptions. Consider incorporating these requirements into contractual arrangements and establishing penalties or incentives to ensure compliance with these requirements.
Look for Contractual Leverage Points: Suppliers often will be reluctant to renegotiate contracts, particularly if it involves potential price increases or sharing of tariff-related risks. Look for contractual leverage points relating to contract renewals or potential expansion of purchasing patterns. Consider moving up contract renewals to combine term extensions with tariff-related risk sharing.

Look for Tariff-Saving Possibilities
Step 10: Maximize Duty Savings Opportunities. A well-structured strategy to minimize duty costs can significantly offset the financial burden of potentially increasing tariffs and improve overall cost efficiency in import operations. By leveraging available tools and programs, companies can enhance cash flow, lower landed costs, and reduce their tariff liabilities while ensuring compliance with Customs regulations. Key duty saving measures to consider using include:

Customs Bonded Warehouses: Customs bonded warehouses allow importers to defer duties by storing imported goods until they are needed. This approach provides cash flow advantages, particularly for products that may be reexported without duty payment.
Foreign Trade Zones (FTZs): FTZs allow companies to store, assemble, or process goods with deferred or reduced tariffs. Goods within FTZs can be reexported duty-free or entered into the U.S. market with reduced duties based on final product classification.
Duty Drawback Programs: Duty drawback programs allow importers to recover up to 99% of duties paid on goods that are later exported. This is especially beneficial for businesses with significant reexport activities or defective goods returns.
Temporary Importation Bonds (TIBs): TIBs allow the importation of goods temporarily without paying duties, provided the goods are reexported within a specified timeframe. TIBs are useful for items like trade show samples, prototypes, or tools of the trade.
Free Trade Agreements (FTAs) and Special Trade Programs: FTAs, such as the USMCA, provide potential access to preferential duty rates. Importers should investigate eligibility for programs such as the Generalized System of Preferences (GSP) for duty-free treatment on qualifying imports.
Apply Tariff Engineering: Importers can legally reduce tariffs by modifying supply chains or the manufacturing steps of products. Tariff engineering can include adjusting production processes to qualify goods under preferential trade agreements, shifting sourcing to countries with lower tariff rates, and implementing minor product changes that result in more favorable classifications. Ensure all changes comply with U.S. Customs and partner agency regulations.

Take Care of Your Supply Chain
Step 11: Identify Your Complete Supply Chain and Map It Out. Supply chain mapping is the process of documenting all suppliers and the flow of goods and products in a supply network. A clear picture of one’s supply chain allows importers to identify efficiency-enhancing opportunities and mitigate the risk of supply chain disruptions. It is possible to create a visual representation of your supply chain using diagrams or software tools, to easily identify connections and pressure points and ensure full knowledge of sub-suppliers, which often is the key compliance risk point for many multinational companies. Some best practices for supply chain mapping include:

Define Your Product: Clearly identify the products you are mapping, as different products may have different supply chains.
Identify Stakeholders: Identify all individuals, suppliers, and contractors who contribute to the production, storage, or distribution of your product.
Understand Supplier Relationships: Get your first-tier suppliers involved in the mapping process and ask them to bring forward knowledge regarding second-tier and third-tier suppliers. Have each entity detail what they sell and what they buy next in the chain from others. As the map expands, you will get a better view of potential risks, bottlenecks, and dangers of relying on single suppliers or businesses with long lead times.
Document the Flow of Materials and Information: Trace the movement of raw materials through each stage of production, including processing, transportation, and storage, while also documenting the flow of information between stakeholders.
Evaluate Supplier Capabilities: Assess each supplier’s production capacity, quality control measures, and compliance with relevant regulations.

Step 12. Conduct a Supply Chain Integrity Check. Compliance with labor and transparency requirements is integral to tariff management. After mapping your supply chain, conducting integrity checks or audits of your suppliers can help your company stay abreast of new developments and comply with laws — especially in the areas of forced labor, human trafficking, modern slavery, and environmental regulations — thus avoiding potential fines or blockages of goods at the border.

Risk Assessment: Once your supply chain map from Step 11 is complete, conduct evaluations of your suppliers and analyze potential risks at each stage of the supply chain, considering factors like geographical location, political instability, regulatory compliance, labor practices, cybersecurity, and financial stability.
Update All Terms and Conditions: Make sure your contracts are up to date, and clearly define expectations of your suppliers regarding quality control, documentation responsibilities, labor practices, and environmental impact.
Incorporate Third-party Audits to Verify Supplier Practices: Use third-party audits, including onsite audits, to help evaluate your suppliers and to assess their compliance with environmental and labor laws and the company’s standards regarding product quality, safety, ethical practices.
Build and Maintain Supplier Relationships: Foster open communication with suppliers and encourage them to disclose any potential issues before they become significant issues. Offer to help address concerns and implement improvements proactively throughout the supply chain system.
Continuous Monitoring: Implement systems and regularly monitor your suppliers’ performance and compliance. Evaluate your supply chain for new potential risks that might arise.

The issuance of President Trump’s “America First Trade Policy” underscores just how far ranging the potential changes to the international trade environment may be. The triple pressures of rising tariffs, likely changes to USMCA requirements, and an increasing focus on supply chain integrity underscore the need for importers to adopt a proactive, multifaceted approach to managing import-related risks. By focusing on risk assessment, supplier diversification, compliance audits, and duty savings, importers can not only weather upcoming challenges but also turn them into opportunities for operational resilience and competitive advantage. Under the Trump administration’s trade agenda, businesses should expect heightened scrutiny of imports and expanded enforcement of customs and labor practices. Preparing now ensures resilience and competitiveness in the face of uncertainty.

BlueCrest – The Court of Appeal Considers Condition B of the Salaried Members Rules

The Court of Appeal has remitted the case of BlueCrest Capital Management (UK) LLP (BlueCrest) v HMRC back to the First-tier Tribunal (FTT) regarding the application of the UK’s salaried members rules (the Rules) to certain members of BlueCrest, an asset manager engaged in the provision of hedge fund management services, following a finding that the FTT and the Upper Tribunal erred in law with regard to the interpretation of Condition B of the Rules.
The Rules recharacterise certain members of a UK limited liability partnership (LLP) as employees (“salaried members”) rather than members of the LLP for income tax purposes. Condition B essentially prevents recharacterisation as an employee/salaried member if the LLP member in question has, in broad terms, significant influence over the affairs of the LLP. In this judgment, the Court of Appeal considered the interpretation of Condition B.
In summary, the Court of Appeal found that – contrary to the position of the FTT and the Upper Tribunal and to HMRC’s published guidance – significant influence for the purposes of this test needed to derive from the legal and contractual framework of the LLP and it was not enough that an LLP member had de facto influence, even if that de facto influence was significant. The Court of Appeal has asked the FTT to reconsider the case using this narrower interpretation. However, this decision itself might be appealed to the Supreme Court. 
LLPs which rely on Condition B/significant influence for any of their members in relation to the Rules should be aware of this development but should also be aware that the case is likely to still have a long way to run.
Overview of the Rules and prior decisions of the FTT and Upper Tribunal
A high-level summary of the relevant aspects of the Rules under consideration in this decision is set out below, together with a summary of the previous decisions in this case. For more information on the background of the Rules and the FTT decision (June 2022) and the Upper Tribunal decision (September 2023), please refer to our Tax Talks blog posts as linked here: BlueCrest FTT Decision – Salaried Member Rules and Asset Managers – Insights – Proskauer Rose LLP and BlueCrest– the Upper Tribunal considers the salaried member rules – Insights – Proskauer Rose LLP.
For UK tax purposes, the general position is that members of UK LLPs are treated as self-employed partners who each carry on the business of the LLP. However, the Rules were introduced to prevent employment relationships being disguised through the use of LLPs to avoid payment of employment-related taxes. In short, the Rules set out three conditions, one of which must be satisfied (or strictly speaking “failed” because the conditions are drafted in the negative) in order for an LLP member to avoid being recharacterised as an employee/salaried member. 
The FTT and Upper Tribunal in the BlueCrest case were both concerned with the application of Condition A and Condition B, two of the three conditions referenced above.

Condition A requires that at the beginning of the relevant tax year, it is reasonable to expect that more than 20% of the total amount to be paid by the LLP to an individual member in the next tax year would not be “disguised salary”. This includes fixed amounts, and amounts which are variable, unless these amounts vary by reference to the overall profits or losses of the LLP. So, to satisfy this condition, it must be reasonable to expect at the beginning of the tax year that at least 20% of the member’s pay will vary by reference to the overall profitability of the LLP.
Condition B is considered satisfied if the mutual rights and duties of the members and the LLP give the individual significant influence over the affairs of the LLP.

The FTT found that the BlueCrest senior investment managers had significant influence over the affairs of the LLP based on their financial influence over a material part of BlueCrest’s overall business, which was sufficient to disapply Condition B. This ran contrary to the elements of HMRC’s published guidance which suggested that Condition B required significant influence over the affairs of the LLP as a whole. In relation to Condition A, the FTT determined that all of the members’ remuneration was disguised salary, because bonuses were calculated by reference to individuals’ performance, not in relation to the profitability of the LLP.
The Upper Tribunal upheld the decision of the FTT, concluding on Condition B that the FTT was entitled to find that (i) the significant influence did not have to extend to all of the affairs of the LLP, as this was an unrealistic approach and would give rise to strange results for larger partnerships, and (ii) that HMRC’s argument that influence should be limited to managerial influence was attempting to read words into the statute. The FTT’s decision on Condition A was also upheld as bonuses were set initially without reference to the overall profitability of the LLP and so were disguised salary.
The Court of Appeal findings on Condition B and significant influence
HMRC argued that the Upper Tribunal made an error of law in its interpretation of Condition B by relying on the de facto position without regard first to what the rights and duties of the LLP members were as a matter of law, and that the decision of the Upper Tribunal should therefore be overturned.
The Court of Appeal agreed and confirmed that, on a proper construction, the test for significant influence was (i) whether the individual had influence over the affairs of the LLP, (ii) whether the source of that influence was the mutual rights and duties of the members of the LLP, in which case it was qualifying influence, and (iii) whether that qualifying influence was significant.
On the first point, influence over the affairs of the LLP, as interpreted by the Court of Appeal, was to be viewed as broader than influence over the business of the LLP and meant the affairs of the LLP generally viewed as a whole and in the wider context of its group. The definition of business in the relevant LLP Agreement should also be taken into consideration. The Court of Appeal considered that the Tribunals had been wrong to confine the test to parts of the affairs of the LLP without a focus on the decision making at a strategic level.
The main focus of the Court of Appeal in their decision related to the second point. The Court of Appeal held that Condition B requires the relevant influence to derive from the “mutual rights and duties” of the members of the LLP and the LLP itself based on the statutory and contractual framework applying to it. In practice, this would mean the influence must derive from the rights and duties of the members as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
Neither HMRC nor BlueCrest had made this argument in the FTT or Upper Tribunal. It had been raised by the Upper Tribunal but in the context of it being “common ground” between the parties that the FTT was entitled to consider the actual position and any de facto influence held by members in addition to the terms of the LLP Agreement. Despite this – and despite acknowledging that HMRC’s own guidance accepted the possibility that the influence in question could derive from the de facto position (an approach which still forms the basis of HMRC’s guidance in its Partnership Manual today) – the Court of Appeal held that it was incorrect to ignore the need for the influence to derive from the legal framework, i.e. the LLP Agreement and the LLP Regulations 2001 (if relevant).
Finally, in relation to the third point that any influence must be significant, the Court of Appeal held that BlueCrest and HMRC had been correct to present evidence on any de facto influence wielded by members, but this should have been used only to evaluate whether qualifying influence was significant.
In light of these points, the decisions of the FTT and Upper Tribunal were set aside and the case remitted to the FTT for consideration of the evidence in light of the correct statutory interpretation of the test.
The Court of Appeal also rejected BlueCrest’s procedural objection that HMRC had been allowed to rely on a new point of law. In doing so, the Court highlighted the public interest in taxpayers paying the correct amount of tax and ensuring justice is balanced with requirements of fairness and case management.
Cross Appeal by BlueCrest – Condition A: variable remuneration 
Although the main focus of the case was on Condition B, BlueCrest appealed on whether the portfolio managers and supervisors of portfolio managers could avoid recharacterisation as salaried members by virtue of Condition A. The Court of Appeal upheld the decision of both Tribunals and confirmed they came to substantially the right conclusion.
The question under Condition A related to whether the definition of “disguised salary” was met. Portfolio managers and supervisors of portfolio managers had three elements of remuneration, one of which was a discretionary allocation akin to a bonus. BlueCrest argued that this had a real link to the profits of the LLP, though the bonuses were not computed by reference to the profit and losses of the LLP.
The Court of Appeal agreed with HMRC’s argument that, on the facts, the overall amount of profits of the LLP merely functioned as a cap on remuneration which was variable without reference to overall profits. Therefore, the Court upheld the Tribunals’ decisions that the individual members of the LLP, including portfolio managers and supervisors of portfolio managers, could not avoid recharacterisation as salaried members/employees by virtue of Condition A. 
Conclusion
The Court of Appeal’s interpretation of what constitutes significant influence for the purposes of Condition B of the Rules is narrower than (i) the position set out in the prior judgments in this case and (ii) the relevant guidance in HMRC’s published manuals. This narrower interpretation ignores de facto influence which is not derived from the mutual rights and duties of the LLP member as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
The Court of Appeal have sent the case back to the FTT for the FTT to reconsider the case in light of this narrower interpretation. It is possible, and perhaps likely, that BlueCrest will decide to appeal the decision to the Supreme Court. In that case, if permission to appeal is granted, the next step would be for the Supreme Court to consider the points raised in this Court of Appeal judgment, rather than the FTT reconsidering the case. We will continue to monitor the proceedings until the final position is known.
LLPs which place reliance on Condition B and their members having significant influence may wish to refresh whether that position would still be appropriate if the narrower interpretation of the test applies, particularly if the members’ position under the salaried member rules relies solely on Condition B.

Tax Proposals Potentially Being Considered by the U.S. House Budget Committee in Reconciliation

On January 17, 2025, multiple news outlets and other sources reported the existence of a memorandum circulated by the U.S. House of Representatives Budget Committee to the House Republican Caucus (the “Memorandum”) containing an extensive list of budget proposals that may be considered in connection with the new Congress’s widely expected budget reconciliation legislation. The Memorandum, which is publicly available via link from a number of news outlets,[1] contains approximately fifty pages of proposals covering a wide range of policy areas and enumerating scores of potential specific legislative proposals (along with estimated budget effects in most cases), some of which are seemingly mutually exclusive. Included in the memo are a number of tax-related proposals, including tariff proposals, which are briefly set forth below.
It is not possible to know whether any or all of these proposals will ultimately be included in the budget reconciliation bill (or any other proposed legislation). It is also very possible that any number of other proposals may be considered in what is expected to be a lengthy legislative process. Additionally, the expiration of a sizable number of the tax provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) may further affect the development of several of these proposals. However, potentially affected taxpayers should be aware of these tax-related proposals and closely monitor all developments involving the budget reconciliation legislation.
Although the Memorandum presents the proposals in no particular order, for ease of reference this blog post organizes the proposals as:

Tax Proposals Involving Tariffs and Trade;
Tax Proposals Affecting Businesses;
Tax Proposals Affecting Employees and Unions;
Tax Proposals for Business Tax Credits;
Tax Proposals Relating to Municipal and other Tax-Exempt Bonds;
Tax Proposals Relating to the Deductibility of State and Local Taxes (“SALT”);
Other Tax Proposals Affecting Individual Taxpayers and Households;
Tax Proposals Affecting Exempt Organizations; and
Tax Proposals Affecting the Internal Revenue Service.

Notably, the Memorandum includes no current proposals relating to the taxation of partnerships and very limited proposals related to international taxation other than as related to trade. Although the proposals in the Memorandum generally do not reference particular sections of the U.S. Internal Revenue Code (“IRC”), where the relevant Section cross-reference is sufficiently clear it is included here to aid the reader.
Tax Proposals Involving Tariffs and Trade

A “Border Adjustment Tax” that would “create a new tax on goods where they are consumed, not purchased” resulting in a “shift from an origin-based tax to a destination-based tax.”
Codify and increase “Section 301 Tariffs” on products from China.
Require “de minimis” value shipments to pay existing “Section 301 Tariffs.”
Create a 10% across the board tariff on all imports.

Tax Proposals Affecting Businesses

Lower the corporate income tax rate to 15%. (IRC Section 11)
Lower the corporate income tax rate to 20%. (IRC Section 11)
Repeal the 15% corporate alternative minimum tax. (IRC Section 55)
Return to immediate expensing of research and development (“R&D”) costs, which under the TCJA are required to be amortized. (IRC Section 174)
Implement “Neutral Cost Recovery for Structures,” to allow businesses to index the value of deductions to inflation and a real rate of return (to address the time value of money).
Subject credit unions (exempt from income tax under current law) to the federal income tax. (IRC Section 501(c)(1))

Tax Proposals Affecting Employees and Unions

Subject employees to tax on employer-provided transportation benefits (such as transit passes and parking) that are excluded from income under current law. (IRC Section 132)
Subject employees to tax on all employer-provided meals and lodging, other than for the military that are excluded from income under current law. (IRC Section 132)
Subject employees to tax on the value of on-site gym facilities intended for employee and family use that are excluded from income under current law. (IRC Section 132)
Impose a federal excise tax on “non-representation spending” by federal unions.
Impose “new limits” on the deductibility of “DEI training” by federal unions.

Tax Proposals for Business Tax Credits

Proposed repeal of tax credits for carbon oxide sequestration, zero-emission nuclear power production and clean fuel production (IRC Sections 45Q, 45U and 45Z), as well as the electric vehicle (“EV”) tax credit. (IRC Section 30D)
Changing the EV credit to be available only to EV buyers, not lessors. (IRC Section 30D)
Repeal of “Green Energy” tax credits “created and expanded” under the Inflation Reduction Act (“IRA”). The discussion of this proposal identifies these credits as including those “related to clean vehicles, clean energy, efficient building and home energy, carbon sequestration, sustainable aviation fuels, environmental justice, biofuel and more.”
Ending the Employee Retention Tax Credit (“ERTC”), by extending the moratorium on claims processing and eliminating the ERTC for claims submitted after January 31, 2024, along with stricter penalties for fraud. (Section 2301 of the CARES Act)

Tax Proposals Relating to Municipal and other Tax-Exempt Bonds

Eliminate the exclusion of interest on municipal bonds. (IRC Section 103)
Eliminate the exclusion of interest on private activity bonds, Build America bonds and other non-municipal bonds. (IRC Sections 103, 141-150)

Tax Proposals Relating to the Deductibility of State and Local Taxes (“SALT”) (IRC Section 164)

Under the TCJA, the SALT deduction is limited to $10,000 per taxpayer, and married persons filing jointly are subject to the same $10,000 limitation as a single filer. This statutory limitation is scheduled to expire in 2025. The memorandum lists five alternative approaches to SALT, four applicable to individual SALT deductions and two to SALT deductions for business:

Make the TCJA $10,000 limitation permanent but double the limitation (to $20,000) for “married couples”.
Make the general provisions of the TCJA provision permanent, but increase the thresholds to $15,000 for individuals and $30,000 for married couples.
Eliminate the deductibility of state and local income or sales taxes, but preserve the deductibility of property taxes. In this proposal, the TCJA $10,000 limitation would be allowed to expire in 2025.
Eliminate the SALT deduction for businesses (presumably including eliminating the pass-through entity tax (“PTET”) workaround), and the individual SALT deduction would be “unchanged from current law.”
Repeal the SALT deduction, in its entirety, for both individuals and businesses (presumably including eliminating the PTET workaround).

Other Tax Proposals affecting Individual Taxpayers and Households

Entirely eliminate the federal estate tax. (IRC Sections 2001-2210)
“Fully repeal” the home mortgage interest tax deduction. (IRC Section 163)
Lower the home mortgage interest deduction cap from the TCJA level of $750,000 to $500,000. (IRC Section 163)
Eliminate the deduction for contributions to qualifying health organizations (patient advocacy groups, professional medical associations and “other U.S.-based charitable organizations with [IRC Section] 501(c)(3) tax status.” (See also Tax Proposals Affecting Hospitals and Health Organizations). (IRC Section 170)
Either raise or eliminate the foreign earned income exclusion on Americans residing overseas. (IRC Section 911)
Replace Health Savings Accounts with a $9,100 “Roth-style” Universal Savings Account indexed to inflation.
Make certain changes to HSAs to increase their availability and flexibility. (IRC Section 223)
Permit a deduction for auto loan interest payments.
Eliminate the deductibility of interest on student loans. (IRC Section 163)
Eliminate the income tax on tips, which are currently subject to income and payroll taxes.
Create a “blanket exemption” on the taxation of “overtime earnings.”
Eliminate the “head of household” filing status. (IRC Section 1)
Eliminate the exclusion of scholarship and fellowship income used for tuition and related expenses. (IRC Section 117)
Eliminate the American Opportunity Credit for qualified educational expenses. (IRC Section 25A)
Eliminate the Lifetime Learning Credit for a portion of certain qualified tuition and related expenses. (IRC Section 25A)
Eliminate the maximum $2,100 credit for child and dependent care. (IRC Section 21)
Requiring both children and parents have a social security number to claim the Child Tax Credit. (IRC Section 24)
Restructure the Earned Income Tax Credit in certain ways. (IRC Section 32)

Tax Proposals Affecting Exempt Organizations

Eliminating nonprofit status for hospitals, and taxing hospitals as “ordinary for-profit businesses.” (See also Tax Proposals Affecting Individuals). (IRC Section 501(c)(3))
Expanding the excise tax on the net investment income of certain university endowments by increasing the rate tenfold, from 1.4% to 14%. (IRC Section 4968)
Expanding the criteria to impose the university endowment excise tax to effectively require certain universities to either “enroll more American students or spend more of their endowment funds on those students,” or become subject to the endowment tax. (IRC Section 4968)

Tax Proposals Affecting the Internal Revenue Service

Repeal remaining increased IRS funding from the Inflation Reduction Act.

FOOTNOTES
[1] See, e.g.,House Budget Committee Circulates New Detailed List of Budget Reconciliation Options Including Draconian Medicaid Cuts Within House Republican Caucus , last visited January 27, 2025. This article contains an embedded link to both the original Politico article reporting the Memorandum (subscription required) and the Memorandum itself. 

CBP Proposes Changes for De Minimis Shipments

U.S. Customs and Border Protection (CBP) has announced two notices of proposed rulemaking (NPRM) that propose changes to the “de minimis” treatment for low-value merchandise. Under Section 321 of the Tariff Act of 1930, articles can be imported into the United States free of duty if the aggregate fair retail value in the country of shipment of articles imported by one person on one day does not exceed $800. CBP’s two NPRMs propose changing the treatment for de minimis merchandise subject to trade and national security actions, as well as the information required for de minimis entries. This GT Alert outlines the NPRMs.
Changes to De Minimis Treatment for Merchandise Subject to Trade and National Security Action
On Jan. 17, 2025, CBP announced a NPRM to change the “de minimis” treatment for merchandise subject to trade or national security actions. Under the NPRM, low-value merchandise subject to specific trade and national security actions (namely Section 201, 232, or 301 tariffs) would no longer qualify for the “de minimis” exemption, meaning that importers would be required to pay both general duties and any additional Section 201, 232, or 301 duties, even when the entry value is less than $800. Additionally, certain shipments claiming this exemption would be required to provide the 10-digit Harmonized Tariff Schedule of the United States (HTSUS) classification for the imported low-value merchandise. In the announcement, CBP said the NPRM intends to protect “intellectual property rights, consumer health and safety protections, and closes enforcement gaps while safeguarding American businesses and workers from unfair trade practices.”
Changes to Information Required for De Minimis Entries
On Jan. 13, 2025, in an earlier similar rulemaking, CBP announced proposed changes to the de minimis shipments that would require additional information when entering de minimis shipments. Currently, importers only need to provide minimal information to CBP when entering de minimis shipments, including descriptions of the merchandise, value, shipping documents, and country of origin of the merchandise. Thus, these shipments enter the United States without most data elements. CBP stated that the proposed rule “will enhance supply chain visibility and will enable CBP to better interdict illegal shipments across U.S. ports of entry.”
The proposed rule would increase data requirements for de minimis shipments and create a so-called “enhanced entry process.” Under the proposal, parties subject to the new requirements would need to provide the following information on each shipment prior to its arrival at a U.S. port of entry on the (i) contents, (ii) value, (iii) origin, and (iv) final destination of eligible shipments. Required information would include:

the clearance tracing identification number, 
HTSUS code, 
a URL or SKU product code or other product identifying information, 
seller name and address, 
purchaser name and address, and 
marketplace name and website, among other items.

According to the Jan. 13 NPRM, these proposed changes would “allow CBP to target high-risk shipments more effectively in advance of the shipment’s arrival in the United States, including those shipments containing synthetic opioids such as illicit fentanyl.”
The comment period for the Jan. 13 NPRM closes Mar. 17, 2025. The comment period for the Jan. 17 NPRM closes Mar. 24, 2025. 
Please note that on Jan. 20, 2025, President Donald Trump ordered a “regulatory freeze pending review” on all proposed or final rules not yet published in the Federal Register, and that agencies “consider” postponing the effective date of any rules already published in the Federal Register for a 60-day period beginning Jan. 20, 2025. The notice also states that during this 60-day period, agencies should consider opening a comment period on published rules not yet in effect. While the language of the executive order does not appear to affect these two NPRMs, as they have no effective date and are merely a request for public comment, it remains to be seen whether these two notices might be impacted by the president’s action.

Carried Interest and Co-Investment Plans: A Primer for Asia-Based Private Fund Managers

This publication is issued by K&L Gates in conjunction with K&L Gates Straits Law LLC, a Singapore law firm with full Singapore law and representation capacity, and to whom any Singapore law queries should be addressed. K&L Gates Straits Law is the Singapore office of K&L Gates, a fully integrated global law firm with lawyers located on five continents.
Management team participation in the performance of the funds they manage—through carried interest and co-investment plans—has long been a regular feature for private equity, real estate, venture capital, and other private funds in the US funds industry. Increasingly in recent years, many Asia-based private fund managers have implemented similar programs.
Fund manager carried interest and co-investment plans offer several advantages, including (a) attracting and retaining top talent, (b) providing “skin in the game” to align participant interests with the interests of the manager and external investors, (c) maximizing upside potential for participants while reducing the out-of-pocket costs and downside risk of higher fixed compensation, (d) fostering a long-term commitment by participants to the manager, and (e) potential tax efficiencies, as further discussed herein.
This article summarizes the key characteristics of fund manager carried interest and co-investment plans from the perspective of an Asia-based manager, including structuring alternatives, key terms and market practice, and tax and regulatory considerations.
Comparison of Carried Interest and Co-Investment Plan Components
Under a “carried interest plan,” each participant shares in the carried interest (i.e., profit distributions) distributed by one or more of the manager’s funds without necessarily needing to make a passive investment. On the other hand, under a “co-investment plan,” the fund manager typically requires each participant to make a passive investment in one or more of the funds managed by the manager, thereby entitling participants to a return of capital and any profits from such investment(s). 
Many managers combine the elements of a “co-investment plan” and a “carried interest plan” into a single plan, so that participants would both (a) make a passive investment in one or more of the manager’s funds, thereby benefiting from the investment returns; and (b) hold a right to receive a portion of the carried interest distributed in respect of such fund(s). 
Participant Co-Investment Plans vs Limited Partner Co-Investment Rights 
The term “co-invest” often has a different meaning in the context of a participant plan as compared to a third-party limited partner (LP)’s co-investment right in a fund. A third-party LP’s “co-investment right” in a fund typically confers on the LP, which will separately hold exposure to a fund’s portfolio investments through its capital commitment to the fund, the option to invest additional capital into specific portfolio investments of the fund. This allows the LP to increase its exposure to certain investments of choice.
In contrast, the term “co-investment” in the context of a participant plan (and as used generally in this article) often refers to a participant’s passive investment in a fund (i.e., its capital commitment), which typically exposes the participant to the performance of all of the fund’s portfolio investments. Similarly, many managers use the term “GP co-invest” to describe the capital commitment (i.e., the “sponsor commitment”) of a general partner (GP) or its affiliates to a fund. Market practice varies on this point, as further discussed in “Fund-Wide vs Deal-by-Deal Participation” below.
Structuring Alternatives
A carried interest and co-investment plan could be structured as either (a) an equity arrangement, where participants hold equity in the vehicle that receives carried interest (the Carry Vehicle); or (b) a contractual arrangement, under which participants are contractually entitled to receive payments of cash based on a fund’s performance. 
In an equity arrangement, a participant would subscribe for an interest in a designated Carry Vehicle, which could be either the GP of the relevant fund or another entity established for the specific purpose of receiving the fund’s carried interest and making the team’s investment to the fund. Any such specially formed entity typically would invest into the fund as an LP and would be known as a special limited partner (SLP). A participant’s co-investment pursuant to an equity arrangement typically would also form a part of the GP’s required “sponsor commitment” to the fund.
It can be simpler and less costly to run a carried interest and co-investment plan through the GP entity itself, rather than through an SLP. That being said, using an SLP is more common for established managers because (a) a fund’s GP has unlimited liability for the fund’s obligations, while an SLP (as an LP of the fund) does not; (b) admitting plan participants into an SLP (rather than the GP) allows the manager to keep the economics of the plan separate from the “control”/decision-making rights and function of the GP; (c) a manager may wish to structure the SLP differently (e.g., in a different jurisdiction) from the fund and the GP for administrative or other reasons; and (d) while a new GP should be established for each successive fund, some managers will continue to use the same SLP for multiple funds.
Alternatively, a manager could structure the plan as a contractual arrangement (rather than an equity arrangement) between the manager and each participant, whereby each participant holds a contractual right to receive an amount of cash as determined by reference to the timing and amounts of carried interest or other amounts distributed by the fund. A contractual approach is generally lower cost and administratively more convenient, as a participant’s contractual rights could be memorialized in the participant’s standard employment or consulting agreement, or a simple letter agreement, rather than requiring full-form documentation for an equity interest in a vehicle. However, in certain jurisdictions (including Hong Kong and Singapore), a contractual approach would likely be less tax efficient, as further discussed in “Tax Considerations” below.
Key Terms and Market Practice
A manager should consider the following key terms when structuring a carried interest and co-investment plan:
Source of Funding for Co-Investment
A key aspect of a co-investment plan is the source of funding for each participant’s co-investment, typically among the following options:
The “Standard” Cash Approach
Each participant funds the co-investment out of pocket in the form of capital contributions over time, in the same manner as other investors in the relevant fund(s). This is the simplest approach, but it also could be burdensome for participants and the manager. For example, for a participant with a modest commitment, it may be inconvenient to fund many small capital calls. With this in mind, a common variation would be for each participant to make periodic cash contributions (e.g., quarterly or annually) independent of the fund’s normal capital call schedule. 
The “Deemed Loan” Approach
The manager extends a loan to the participant representing all or a portion of the participant’s investment amount. Under this approach, the loan is typically repaid to the manager out of future distributions in priority over payments to the participant until the loan is fully repaid. It is also possible for the loan to be “nonrecourse,” such that the loan is subject to repayment only out of distributions, and the participant would not be required to pay in any capital, even if distributions are insufficient to pay out the loan. Of course, this nonrecourse approach would add more downside risk to the manager. 
The “Free Share” Approach
The manager would fund a participant’s co-investment amount on the investor’s behalf, potentially representing a key component of the participant’s compensation package. This approach could align incentives between a manager and a participant by more efficiently tying compensation to fund performance than cash compensation. In addition, vesting conditions could further incentivize the participant to remain with the firm. However, in addition to manager-funded contributions being taxable to the co-investor, this approach also could reduce the likelihood of favorable tax treatment on the participant’s carried interest. See “Tax Considerations” below.
In any case, participants in a co-investment plan will typically be entitled to receive a share of the fund distributions equal to their pro rata interest in the relevant fund(s) in the same manner as other investors, either directly from such fund(s) or indirectly through the Carry Vehicle. 
Fund-Wide vs Deal-by-Deal Participation 
As noted above, participation in a co-investment plan would typically provide for exposure to the entire portfolio of each relevant fund (i.e., fund-wide exposure) in the same manner as any other passive investor in the fund. However, some co-investment plans—particularly for larger managers—provide participants the option to increase their exposure to specific portfolio investments (i.e., deal-by-deal exposure). 
External investors typically would prefer that any participant’s co-investments be fund-wide (and not deal by deal) to reduce conflicts of interest and the perception that a participant could “cherry-pick” exposure only to the best investments. LPs are particularly concerned because the participants typically include the deal team members with the greatest access to information on each investment. 
A manager should separately consider whether participation in carried interest would be on a “fund-wide” or “deal-by-deal” basis, though a “fund-wide” approach is much more common for most types of managers. In the case of a fund-wide participation, a participant’s share of the carried interest would be based on the aggregate carried interest of the fund, regardless of which investments such participant has been involved with. In the case of a deal-by-deal participation, a participant would share in carried interest that is allocable to specific investments. 
Key factors driving this decision include (a) the size of the firm and the depth of its infrastructure, (b) the number of participants in the program, and (c) whether or not participants are responsible for only specific deals or a fund’s entire portfolio. 
A fund-wide program can better incentivize each participant’s efforts toward the performance of the entire fund, whereas deal-by-deal exposure can allow a manager to incentivize each deal team more efficiently. A fund-wide program is easier to manage administratively than a deal-by-deal program, which requires allocating carried interest (calculated with reference to the entire portfolio across deals) across investments and tracking each participant’s exposure separately. Further, actual carried interest distributions are typically backloaded due to a fund’s standard “distribution waterfall,” which can make it prohibitively difficult to determine how much carried interest to allocate to early dispositions until later in the fund’s life. Some managers will offer a hybrid program whereby participants have exposure to all investments and, in some cases, may have additional exposure to specific investments.
Carry Points
A participant’s right to share in carried interest of a fund is typically quantified in terms of “points,” which correspond to a specified percentage of the overall carried interest distributions with respect to the applicable fund(s) or the specific investments in such fund(s). 
Market practice varies widely on the portion of the overall carried interest share to be allocated to the pool of participants, on the one hand, and the founder or institutional manager, on the other hand. Key factors typically include the size and type of a firm, the region or country it is based in, and the firm’s organizational structure and culture. For example, state-owned firms or larger firms would often adopt a more conservative approach to profit sharing, resulting in a lesser carry share allocated to participants. In many cases, firms that offer lower fixed compensation (e.g., new managers that may not yet generate significant management fees) often would look to carried interest allocation as a significant element of the participant’s overall compensation arrangement. 
In addition to the founders, carry participants typically include senior officers and investment professionals. Some carried interest plans include a broader range of personnel, such as consultants (e.g., venture partners), junior investment professionals, and potentially even administrative and clerical staff. By carefully considering all available factors, managers can allocate carry points in a manner that incentives peak performance while maintaining a collaborative team environment.
Dilution of Carry Points
Participants in a carried interest plan may be subject to dilution in respect of their share of the carried interest, often subject to limits. Some carried interest plans permit a manager to issue additional points in the future without limitation (i.e., an unlimited pool), which would allow for limitless dilution. However, it is also common for a carried interest plan to establish a fixed number of carry points, such that (a) a portion would be issued to initial participants, and (b) a “reserve pool” (i.e., a portion of the initial fixed number of carry points) would remain available for the manager to issue to existing or new participants. 
Any carried interest distributions attributable to carry points in the reserve pool that have not been allocated to participants would typically be for the benefit of the principal(s). In addition, any carry points that are forfeited (due to failure to vest or other reasons, as described in “Vesting of Carry Points” below) would be added back to the reserve pool.
Some carried interest plans provide for two classes of interests: one for founders and other senior executives, and another for rank-and-file team members. In such cases, carry points that are attributable to rank-and-file team members often would not be subject to dilution. 
Key interests to balance when considering dilution are (a) the manager’s need for flexibility to scale and bring on new talent, and (b) the participants’ desire for certainty as to their percentage interest in the fund’s carried interest. As carry points are typically allocated fund by fund, a manager with multiple funds or frequent successor funds may have more flexibility to manage this issue over time.
Vesting of Carry Points
Carry points are often subject to “vesting,” permitting participants to retain their points and receive the corresponding carried interest distributions only if they remain involved with the manager or the fund over a particular span of years (i.e., vesting period). Accordingly, vesting arrangements are designed to align participants with the long-term performance of the fund(s) that they manage. While vesting terms (or similar provisions) are standard for carried interest plans, co-investments would not be subject to vesting unless funded by the manager (such that the participant has not put capital at risk).
Vesting provisions are typically structured as follows: 
For-Cause Departure
If a participant is required to depart involuntarily and for cause, the participant will typically forfeit all vested and unvested carry points.
Voluntary Departure or Involuntary Departure Without Cause
If a participant departs voluntarily or involuntarily without cause, the participant typically would be entitled to retain any vested carry points but would forfeit any unvested carry points. 
Death or Permanent Disability
In the unfortunate event of a participant’s death or permanent disability, the participant (or his or her estate) would typically retain all vested carry points, and all or a portion of any unvested carry points might be deemed vested and retained. 
The duration and schedule of vesting periods vary significantly across funds. Conceptually, the vesting period should correlate with the time during which a participant contributes meaningfully to the establishment and ongoing operations of the fund and its investments. Arguably, this period often spans from the start of the fund’s marketing activities to its liquidation date. However, many carried interest plans provide for a vesting period commencing at a fund’s initial closing and ending around the end of the fund’s investment period. 
While some vesting schedules provide for “straight line” vesting, whereby entitlements vest in equal instalments over time, other arrangements (e.g., cliff vesting) are also common. For example, some funds would provide for 15% vesting over the first four years (i.e., 60% total), followed by 20% vesting over each of years five and six (i.e., the remaining 40%). 
In lieu of a vesting arrangement, some carried interest plans provide for a buy-back mechanism, giving the manager an option to repurchase a participant’s carry points (and, potentially, co-investment) based on a preagreed formulation upon certain triggering events (e.g., the participant ceases to be involved in the management of the relevant portfolio investments).
Restrictive Covenants 
Participants in carried interest and co-investment plans are often subject to restrictive covenants that are similar to those commonly included in employment or consulting agreements, typically including (a) noncompete and nonsolicitation provisions, often surviving for six to 12 months following termination of employment; (b) nondisparagement provisions, which prohibit participants from speaking negatively about the firm or its management; and (c) confidentiality obligations. Nondisparagement and confidentiality restrictions often remain in effect for years. 
A breach of these restrictive covenants would typically be a “cause” event that, as discussed above, would trigger forfeiture of all vested and unvested carried interest, among other consequences. Even a former participant who had previously ceased to be involved with the manager and the fund on good terms could forfeit any retained carried interest upon subsequent violation of any such restrictive covenant. In addition, such a breach often triggers an option for the manager to repurchase any co-investment interest held by the participant.
Discounts on Management Fee and Carried Interest for Participant Co-Investments 
Many managers reduce, or waive entirely, the amount of management fee and carried interest to be borne by the participants in respect of their co-investments, taking the view that it is beneficial for the fund and the manager to have greater team participation. Some larger managers will follow a hybrid approach, offering reduced/waived fees and carried interest for participants for only the funds they are involved in, or only up to a certain investment size.
Compliance With Fund Documents and LP Side Letters
Fund investors will often expect to see provisions in a fund’s governing agreement (e.g., a limited partnership agreement (LPA)) or may proactively request side letter provisions, which restrict or otherwise influence certain dynamics of a carried interest and co-investment plan, as follows:
Minimum Sponsor Commitment
A fund’s LPA typically will require that the manager and its related persons make capital commitments to the fund of at least a specified percentage of the fund’s aggregate commitments. The minimum is often in the range of 1%–5% but could be higher depending on the type of fund and the extent to which the manager is also viewed as a capital partner. A key benefit of a carried interest and co-investment plan is that participant co-investments typically would count toward this minimum sponsor commitment amount.
Clawback Guarantees
A fund’s LPA typically will provide that if the fund receives more carried interest than it should have, measured over the fund’s lifespan, the carried interest recipient(s) must return any excess (net of taxes) for distribution to the fund’s LPs. Often, the LPA will also require that the fund’s GP require each indirect recipient of carried interest to guarantee such recipient’s portion of this obligation. Accordingly, many carried interest plans will require each participant to agree to a “back-to-back” guarantee with respect to such participant’s share of the carried interest.
Change-of-Control Provisions
Some investors in the market will ask the fund’s GP to agree that one or more named persons—or categories of related persons—continue to hold the right to receive a minimum (e.g., 50% or 75%) of the carried interest, in addition to maintaining decision-making control over the GP itself. Such provisions, including whether specific carried interest plan participants would be considered part of this permitted control group, need to be accounted for when budgeting for the future allocation (or transfers) of carried interest rights under the plan.
Anchor Investor Rights
Some investors in the market, in consideration of making a large investment in the fund (e.g., 20% or more of the manager’s first fund), will request to share in a portion of the carried interest borne by all of the fund’s other investors. Similar to the change-of-control provisions described above, a manager will need to account for any such anchor investor allocation when budgeting for future allocation (or transfers) of carried interest rights under the plan.
Tax Considerations
In many jurisdictions, including Hong Kong and Singapore, the tax treatment of income derived by participants from carried interest and co-investment plans can vary based on the structure of such plans and the specific circumstances.
While income in consideration of services is taxable in Hong Kong and Singapore, capital gains are not taxable in Hong Kong or Singapore (unlike in the United States, where capital gains are taxed at a reduced rate). 
Accordingly, returns derived from a Hong Kong or Singapore participant’s passive investment (i.e., co-investments funded by the participant) generally should not be taxable in Hong Kong or Singapore (as applicable), though co-investments funded by the manager rather than by the participant (via a deemed loan or free share approach) could raise unique tax issues. Similarly, carried interest often takes the form of a return on investment, the income of which could potentially be treated as capital gains. 
Under a contractual approach where a participant holds a contractual right to share in the carried interest, any such distributions would likely be deemed income constituting compensation for services—rather than as return on investment—which would be taxable in Hong Kong and Singapore. An exception for Hong Kong participants is that carry returns allocated to them may be exempt from salaries tax under Hong Kong’s tax concession regime for carried interest, provided the relevant conditions are met. Singapore, however, does not have any similar tax concession regime. 
In addition, the timing of granting carried interest rights to a participant (e.g., before or after (a) the fund has made investments, (b) appreciation in value of investments, and (c) distributions) can affect the tax analysis. Managers and participants should also consider the relationship between any vesting provisions and the relevant tax treatment.
The considerations described above similarly impact how carried interest is taxed in Japan, although a manager should discuss any specific Japan tax issues with its Japan tax advisor.
In any case, it is important for both managers and participants to consult with their tax advisors to ensure compliance with local regulations while maximizing the tax efficiency of their carried interest and co-investment plans, taking into account the applicable jurisdiction(s) and the specific facts and circumstances. 
Regulatory Considerations
Depending on the structure of the carried interest and co-investment plan, regulations governing the licensing of fund managers and the offering of plan interests may apply in certain jurisdictions. For example, each of Hong Kong, Singapore, and Japan have licensing rules and investor suitability tests that can apply with respect to carried interest and co-investment plan participants depending on the specific circumstances. These rules would not necessarily limit a manager from inviting participants into a plan, but they should be considered on a case-by-case basis with advisors.
Conclusion
As the private funds sector in Asia continues to grow, understanding the nuances of structuring carried interest and co-investment plans is crucial for managers to implement effective team incentive programs. By navigating key terms and tax considerations effectively, managers can establish robust incentive structures to retain top talent, align participant interests with the manager’s long-term goals, and drive growth in an increasingly competitive market. 

New IRS Regulations Address Cross-Border Cloud Computing and Digital Infrastructure Transactions

Go-To Guide:

IRS issues final regulations classifying cross-border cloud transaction income as service income, including for purposes of sourcing such income for U.S. federal tax purposes. 
Proposed regulations introduce a three-factor test for sourcing cloud transaction income based on location of intangible property, personnel, and tangible assets. 
In light of the new rules, U.S. and non-U.S. businesses engaging in cross-border cloud computing and digital infrastructure transactions should carefully consider the location of their personnel, intangible property (including R&D activity), and tangible property that contribute to the generation of income from such transactions to optimize their tax planning and tax efficiency. 
Proposed regulations also include anti-abuse provisions that seek to prevent artificial reduction of U.S. federal income tax liability in a manner inconsistent with the regulations’ purpose. 
Final regulations refine definitions of cloud transactions and digital content transactions, replacing de minimis rule with predominant character test.

On Jan. 10, 2025, the IRS released two sets of regulations under Section 861 of the Internal Revenue Code. The Final Regulations treat income from cloud transactions as income from services and clarify definitions of cloud transactions and digital content transactions for U.S. federal income tax purposes. The Proposed Regulations provide a mathematical formula to determine the source of income from cloud transactions, based on the location of the taxpayer’s employees and assets (both tangible and intangible).
The Final Regulations took effect Jan. 14, 2025. The Proposed Regulations will not become effective until the IRS adopts final rules.
Impact on US and Non-US Businesses
The new regulations impact businesses across all industries, due to the widespread use of digital and cloud-based transactions. As mentioned in our August 2019 GT Alert, before the Proposed Regulations, the rule for sourcing income in connection with cloud transactions for U.S. federal tax purposes was unclear, and sourcing of such income was determined under the general rules under Section 861 and Section 862 of the Internal Revenue Code. 
As discussed in more detail below, the Final Regulations and Proposed Regulations provide welcome guidance on how to analyze whether and what portion of income derived by non-U.S. businesses from providing on-demand network access (cloud transactions) in the United States would be sourced to the United States for U.S. federal income tax purposes, and would therefore generally be subject to U.S. tax. 
This guidance is also relevant to U.S. businesses engaging in cloud transactions outside the United States because the sourcing of their income from such transactions would affect their ability to claim foreign tax credits in the United States for foreign income taxes imposed on such income. 
Under the Proposed Regulations, if finalized as proposed, income from cloud transactions would be considered U.S.-sourced (and would therefore generally be subject to U.S. tax) to the extent that the non-U.S. business’ personnel, intangible property, and tangible property contributing to the generation of such income are located or performed within the United States. Factors such as the customers or executing agreements’ locations would not be relevant for purposes of such determination.
In light of the new final and proposed regulations, U.S. and non-U.S. businesses engaging in cross-border cloud computing and digital infrastructure transactions should carefully consider the location of their personnel, intangible property (including R&D activity), and tangible property that contribute to the income generation from such transactions to optimize their tax planning and tax efficiency.
Cloud Transactions as Service Income
The Final Regulations define a cloud transaction as “a transaction through which a person obtains on-demand network access to computer hardware, digital content, or other similar sources” and classify income from cloud transactions solely as income from the provision of services for U.S. federal income tax purposes. This differs from the 2019 Proposed Regulations, which classified income from cloud transactions either as income from the provision of services or from the lease of property based on nine factors enumerated in those regulations.
Proposed Three Factor Sourcing Test
For purposes of sourcing income from cloud transactions between U.S. source income and non-U.S. source income for U.S. federal income tax purposes, the Proposed Regulations follow the general sourcing rule that applies to service income, i.e., sourcing based on where the services are performed. 
Under the Proposed Regulations, to determine the source of income, the location of the cloud services generating the cloud transaction income would be determined based on the location of the following three factors, to the extent they contribute to generating that income: 

1.
Intangible property: The intangible property factor reflects the contribution of intangible assets, such as software, algorithms, and research, to the performance of cloud services. It includes research and experimentation expenses, royalties, and amortization for intangible assets used in the service. This factor is sourced based on the location of employees involved in research and experimentation related to the cloud transaction, and expenses are allocated among transactions based on their relative income. The IRS aims to use practical proxies like compensation and research expenditures to avoid complexities in tracing intangible property’s direct contribution. 

2.
Personnel: The personnel factor accounts for the contribution of employees who directly engage in providing cloud services, such as technical staff and immediate managers overseeing operations. It excludes those in strategic, sales, or administrative roles. Compensation for these employees is allocated based on the time they spend working on cloud transactions. The portion of this factor attributed to U.S. sources is determined by the location of the employees performing these activities, ensuring that only those directly involved are included in the calculation. 

3.
Tangible Property: The tangible property factor includes the value of physical assets, like servers and networking equipment, used in cloud transactions. It is calculated by including depreciation and rental expenses for property directly supporting the service. The U.S. portion of this factor is based on the location of the tangible property. Depreciation is computed without considering accelerated tax deductions, reflecting the true economic life of the property used in providing the cloud service.  

The Proposed Regulations outline a formula to determine the U.S.-sourced portion of gross income from cloud transactions. This formula involves multiplying the gross income by a fraction. The denominator of this fraction is the sum of the three factors (intangible property, personnel, and tangible property), regardless of their location. The numerator is the sum of the portions of these factors that are located or performed within the United States.
A taxpayer is allowed to aggregate substantially similar cloud transactions and source the gross income from those transactions as if they were one transaction, but prohibits aggregation if it materially distorts the source of income. However, the Proposed Regulations’ sourcing rule would apply on a taxpayer-by-taxpayer basis. Therefore, when calculating the gross income of an entity that provides cloud services, only the assets and personnel of that entity are considered. 
The Proposed Regulations also include a general anti-abuse provision, under which if the taxpayer has entered into or structured one or more transactions with a principal purpose of reducing its U.S. tax liability in a manner inconsistent with the regulations’ purpose, the IRS would adjust the source of the taxpayer’s gross income to reflect the location where the cloud transactions is performed.
The Proposed Regulations are not final Treasury regulations and, in the absence of an actual reliance provision within them, taxpayers cannot rely upon them. Nonetheless, they provide guidance and insight into the IRS’s directional thinking regarding sourcing income from transactions involving cloud computing and digital infrastructure. Further, income from cloud transactions characterized as services income may be re-sourced under the provisions of an income tax treaty if the taxpayer qualifies for the treaty’s benefits. This re-sourcing could be particularly significant for foreign tax credits, offering additional considerations for cross-border tax planning.
Digital Content Transactions
The Final Regulations define a digital content transaction as a transaction that constitutes a transfer of digital content or the provision of modification or development services or of know-how with respect to digital content. The definition of digital content remains unchanged but is refined to include “content that is not protected by copyright law solely because the creator dedicated the content to the public domain.” The Final Regulations replace the de minimis rule with a predominant character rule for characterizing transactions with multiple elements. The “predominant character” is determined by the primary benefit of value received by the customer, and the rule would apply to both digital content transactions and cloud transactions.
Connie Keng also contributed to this article.

IRS Pilots New Alternative Dispute Resolution Procedures

Go-To Guide:

IRS launches pilot programs to expand alternative dispute resolution options for taxpayers. 
Fast Track Settlement now allows partial case resolution and does not prevent later Post Appeals Mediation. 
New “Last Chance Fast Track Settlement” offers small business taxpayers an additional opportunity to resolve issues. 
IRS must now provide explanations for ADR request denials, with first-line executive approval required.

On Jan. 15, 2025, the Internal Revenue Service (IRS) announced three new pilot programs in an effort to expand the reach and appeal of alternative dispute resolution (ADR) processes available to taxpayers. These ADR processes are designed to allow taxpayers and the IRS to resolve their disputes more efficiently than through the traditional resolution paths.
While the IRS announcement refers to three pilot “programs,” there is only one truly new program, Last Chance Fast Track Settlement. The other “pilots” are changes to the existing Fast Track Settlement (FTS) program. 
Background
The IRS has offered ADR options since the late 1990s, when it began focusing on ways to streamline and expedite the dispute resolution process. Until then, an unagreed issue at examination could take years to resolve, creating a large inventory of cases that lingered in the administrative system for years, with many proceeding unnecessarily to litigation. Over the years, the IRS has added several tools to its ADR “toolbox” seeking to reduce the time it takes to resolve a dispute. It is generally beneficial for both taxpayers and the IRS to resolve matters at the lowest possible level; ADR tools make that possible.
Fast Track Settlement (FTS) was piloted in 2001 for Large and Mid-Size Business division taxpayers. (LMSB is the predecessor to Large Business & International (LB&I)). It became permanent in 2003, and eventually expanded to include Small Business and Self Employed (SBSE) taxpayers, Tax Exempt/Government Entity taxpayers (TEGE), and taxpayers with collection issues. FTS is a mediation-like process through which taxpayers can resolve their issues while still in examination’s jurisdiction. A specially trained appeals case team leader (ACTL), who serves as mediator, facilitates the mediation.
Post Appeals Mediation (PAM) is also a mediation process, but PAM occurs after a taxpayer has been unable to resolve its matter using the traditional appeals process. In PAM, the taxpayer and the appeals officer work with an appeals mediator to try and reach resolution. Historically, taxpayers have been unable to proceed to PAM if they utilized FTS during examination.
Pilot Program Changes
Changes to FTS and PAM
Under the pilot program, FTS can be applied to one or more issues in the case. Historically, if there was an ineligible FTS issue, the entire case was ineligible. This “rule” had somewhat loosened over the years, but with this announced change, it is now “official.”
A key change to FTS is that participation in FTS will not prevent the taxpayer from seeking PAM. This is a meaningful change as it provides taxpayers with an additional opportunity to obtain resolution without proceeding to litigation.
In addition, requests to participate in FTS and PAM may not be denied without first-line executive approval. In the event of a denial, the taxpayer will receive an explanation for the denial, something that was not previously required.
Last Chance FTS
Also being piloted is a new program for SBSE taxpayers called Last Chance FTS. Under this new program, SBSE taxpayers may enter FTS after the issuance of a 30-Day Letter and/or filing a protest to the IRS Independent Office of Appeals. This is a major change from the traditional FTS process, in which a taxpayer cannot seek FTS once the 30-Day Letter has been issued. To encourage more SBSE taxpayers to seek mediation, SBSE taxpayers will remain eligible for FTS even after the protest has been filed. Last Chance FTS provides one more opportunity to resolve an issue. The IRS is hoping to learn whether offering a “last chance” for FTS and reminding taxpayers of their mediation options immediately before the case moves into appeals jurisdiction would increase overall use of the programs. ADR Considerations
The ability to resolve cases at the earliest possible level in the process may benefit both taxpayers and the IRS. Early resolution means earlier certainty and reduced interest costs, two key considerations for most taxpayers. Nonetheless, the ultimate decision as to whether ADR makes sense in a particular situation should be thoughtfully considered. Taxpayers should consult with experienced counsel in reviewing the available resolution options and in determining whether ADR is a good fit for their matter.

IRS Fast-Track Settlement Has Been Refined to Improve Accessibility

Taxpayers whose tax returns the IRS examines may experience long administrative delays in working with the IRS to resolve unagreed issues. About twenty years ago, the IRS developed a procedure – fast track settlement – to accelerate resolution.[1] The IRS recently made three refinements to the procedure that may increase its attractiveness for some taxpayers.[2]
Fast-Track-Settlements: After examining an issue, the examination team[3] furnishes a taxpayer with a notice of a proposed adjustment if the team determines that a tax adjustment should be made.[4] Each proposed adjustment results in a such a notice. A large taxpayer may receive hundreds of notices of proposed adjustments over the course of the examination, which may take months or years until all the notices of proposed adjustments are received and the examination is concluded.[5] 
Absent the fast-track process, a taxpayer must wait to dispute a proposed adjustment until it receives all the notices of proposed adjustment that the team will issue, and then further wait to dispute a proposed adjustment until the taxpayer receives a notice of proposed deficiency (“Thirty-Day Letter”).[6] The taxpayer can then protest the proposed adjustment and request a conference with the Independent Office of Appeals on each issue that the taxpayer disputes. Thereafter, the taxpayer will present its case for all disputed issues to the assigned appeals officer and await the appeals officer’s dispositive recommendation.[7]
Fast-track settlement is designed to cut through these delays. In essence, an IRS appeals officer, trained in mediation, mediates the issue on which the taxpayer and IRS examination division cannot agree. The appeals officer may recommend settlement of the issue, which is subject to the typical procedures that would be applicable if the appeals office had jurisdiction over the issue pursuant to a taxpayer’s protest.[8]
Fast-track may be requested by either the taxpayer or the IRS examining division. If the case is accepted for mediation, the objective is to resolve the issue within 120 days of acceptance.
Process Refinements:
Refinement Number One: A fast-track application will not be rejected even if the case has an issue not eligible for fast-track. Previously, an entire case[9] was ineligible for fast-track if it contained even a single issue ineligible for fast-track. Ineligible for fast-track settlement were issues that the IRS designated for litigation or considered for litigation, issues involving negotiations with foreign tax authorities through the competent authority process, and whipsaw issues.[10] Now, an ineligible issue in the case will not disqualify all other issues in the case for fast-track.
Furthermore, the refinement makes rejection of an application for fast-track more difficult. Previously, an IRS employee designated as a fast-track manager could reject the application. Now, a first-line executive – like the Director, Examination Appeals or the Director, Field Operations for the Large Business and International Division – must agree to rejection of a fast-track application. Finally, if the application is rejected, the executive must explain the reason for rejection to the taxpayer to enhance transparency of the fast-track process.
Refinement Number Two: The Appeals Office is required to call a taxpayer that files a protest with the Appeals Office to remind the taxpayer that fast-track is available. The Appeals Office will take this action prior to accepting Appeals jurisdiction of the case. The IRS apparently believes that publication of the procedure is not enough for taxpayers and their representatives to know about fast-track or focus on it as a viable method to resolve unagreed issues.
Refinement Number Three: A taxpayer who participates in a fast-track procedure that fails to resolve the unagreed issue may request post-appeals mediation.[11] Previously, post-appeals mediation was not available if a taxpayer had participated in fast-track. Post-appeals mediation allows the taxpayer to select a co-mediator who will mediate the issue along with the appeals office mediator. In fast-track, the only mediator is the IRS appeals officer.
Success of Fast-Track: Fast-Track appears to have had a reasonable degree of success. The IRS has invested resources in the process, which suggests that it is attempting to overcome some recalcitrance in the examination divisions to “give away” an issue. That is not to say, of course, that the taxpayer should expect the appeals officer to have a “fire sale” mentality in an overeager effort to achieve resolution of issue. Nonetheless, the new enhancements should make the procedure more accessible and workable.
Considerations: A taxpayer substantially discloses its defense in fast-track for an unagreed issue. The scope of the disclosure may influence how the taxpayer tries the case if the taxpayer proceeds to litigation. If litigation appears most probable, a taxpayer might decide that taking a chance on fast-track is not worth providing the IRS with an early education of the defense. There are obviously many procedures and approaches to be weighed in choosing the optimal means to resolve an unagreed issue. Fast-track clearly is one procedure that should be considered.

[1] Rev. Proc. 2003-40, 2003-1 C.B.1044 (June 3, 2003).
[2] Announcement 2025-6 (Jan. 15, 2025). Other procedures to accelerate issue resolution and avoid litigation include pre-filing agreements, early referral to appeals, the compliance assurance process, and advance transfer pricing agreements.
[3] The examination team is assigned to one of the examination divisions. Large Business and International, Small Business and self-Employed, and Tax Exempt and Government Entities are the divisions subject to the fast-track settlement procedure.
[4] Taxpayers within the jurisdiction of the Large Business and International Division typically receive Form 5701 for each proposed adjustment.
[5] The taxpayer may respond to a notice of proposed adjustment, which the examination team typically records in the Form 5701 along with its rejoinder to the taxpayer’s response.
[6] Treas. Reg. §601.105(d).
[7] I.R.C. §7803(e).
[8] Re. Proc. 2003-40, §2.03. The customary role of an appeals officer is not mediation. An appeals officer who hears a taxpayer’s protest of a proposed deficiency is trained to assess the IRS’s litigation risk on the unagreed issues and propose resolution based on the litigation risk.
[9] The case is composed of all adjustments proposed for the taxable year or years under examination.
[10] A whipsaw issue occurs when the taxpayer engaged in a transaction with a third party and resolution with the taxpayer may have an opposite effect on the tax treatment of the third party.
[11] As the name implies, post-appeals mediation occurs after the appeals officer hears the taxpayer’s protest and recommends resolution of the unagreed issues in the protest.

Tariffs And California’s Anti-Price Gouging Law

Earlier this week, President Donald Trump remarked that he is “thinking in terms of 25%” tariffs on goods imported from Mexico and Canada”.  A tariff is a tax levied upon imported goods.  When goods enter the United States, they are classified and tariffs are assessed using the Harmonized Tariff Schedule of the United States (HTSUS), a compendium of tariff rates based on a globally standardized nomenclature. 
Importantly, the tariffs are paid to the U.S. Customs and Border Protection department.  This fact may have important implications under California’s anti price gouging statute, Penal Code Section 396.  As discussed in prior posts this week, this statute prohibits, among other things, sales or offers to sell any consumer food items or goods (as defined), goods or services used in emergency cleanup, emergency supplies (as defined), medical supplies (as defined), home heating oil, building materials (as defined), housing (as defined), transportation, freight, and storage services (as defined), or gasoline (as defined) or other motor fuels for a price of more than 10% greater than the price charged by that person for those goods or services immediately before the proclamation or declaration of emergency.  However, a greater price increase is not unlawful under the statute if the seller can prove that “the increase in price was directly attributable to additional costs imposed on it by the supplier of the goods, or directly attributable to additional costs for labor or materials used to provide the services, during the state of emergency or local emergency, and the price is no more than 10 percent greater than the total of the cost to the seller plus the markup customarily applied by that seller for that good or service in the usual course of business immediately prior to the onset of the state of emergency or local emergency”.  
As noted above, tariffs are not imposed by the sellers of goods.  Tariffs are imposed by the U.S. government.  The statutory exception refers only to additional costs “imposed by the supplier of the goods” (emphasis added).  Therefore, it is questionable whether the a seller may impose a greater than 10% price increase based upon an increase in tariffs imposed by the federal government.  However, not allowing sellers to justify price increases based on increases in tariffs would likely have the unintended consequence of reducing supplies of much needed goods during emergency. 

Mastering Middle Eastern Markets: 8 Essential Tips for Global Employers

Setting up operations in the Middle East comes with a unique set of challenges and considerations requiring knowledge of regional legal obligations and cultural practices that can affect workplaces—from the necessity of establishing a physical presence to navigating the distinct workweek structures. In addition to these, employers may need to take into account factors such as the region’s taxation policies, the requirements for hiring local nationals, the role of public relations officers (PROs), the specifics of employment agreements, statutory benefits, and the procedures for discharging expat employees. Below is a round-up of eight of the most common and critical issues employers may face when doing business in Israel, Kuwait, Lebanon, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—which have all become very popular countries with expat populations.

Quick Hits

Expanding business into the Middle East may require global employers to navigate unique challenges such as establishing a physical office presence, adhering to distinct workweek structures, and understanding regional tax policies.
Employers must comply with requirements around hiring local nationals, employing public relations officers (PROs) for government interactions, and providing specific statutory benefits like reduced Ramadan hours and end-of-service gratuity.
Additionally, the process of discharging expat employees involves several steps, including visa cancellation and ensuring all statutory payments are settled.

1. Physical Presence Requirements
One of the first things employers need to consider when setting up operations in the Middle East is the relevant countries’ physical presence requirements on employers. Unlike many regions where remote work is becoming the norm, the Middle East still places significant importance on maintaining brick-and-mortar offices. Specifically, some countries require that employers have a certain square footage of real estate in the country to do business. Moreover, this requirement is directly tied to the number of visas granted for expat employees.
Countries like the UAE, Saudi Arabia, Kuwait, and Qatar each have specific criteria regarding the amount of local real estate a company must lease, which correlates with the number of visas they can obtain. Thus, employers may need to pay particular attention to how they plan to structure their physical workspaces in each of these countries in accordance with local requirements.
2. Workweek Structure
Another unique aspect of doing business in the Middle East is the workweek structure. In Islamic countries, the workweek runs from Sunday to Thursday, with Friday and Saturday as the weekend. This schedule is mandatory in countries like Saudi Arabia, Kuwait, and Qatar because Friday is a day of rest in Islam, which is the national religion in those countries. Notably, the UAE has recently placed its public-sector workforce on a Monday-to-Friday workweek to align more closely with Western business practices. This change has influenced many private businesses to follow suit and shift their workweeks to align with the government calendar.
3. Taxation Nuances in the UAE
The UAE stands out among the countries in the Middle East in that it does not impose personal income taxes on workers, making it an attractive destination for expats, who make up the majority of the workforce. Thus, employees in the UAE take home their full gross pay without deductions for social contributions or pensions. Additionally, employers are responsible for providing medical insurance to their employees, but not for providing pensions.
While there are no personal income taxes, the UAE requires businesses to pay corporate taxes based on the revenue they generate, albeit at a relatively low rate, which continues to attract businesses to the region.
4. Localization Requirements
With a significant expat population, some Middle Eastern countries are implementing Saudization or emiratisation rates to protect local workforces requiring employers to hire a certain number of local nationals as a protective measure. For instance, the UAE has an emiratisation rate requiring companies to employ a certain number of local nationals. Similar laws exist in Saudi Arabia, where finding local employees can be challenging due to the government’s strong support for its citizens, often resulting in many locals holding government jobs.
5. Public Relations Officers (PROs)
A unique requirement in the Middle East is for companies to have a public relations officer (PRO), which is an individual who interacts with the government on behalf of the company. This role, which is sometimes outsourced, must be filled by a local. PROs handle various administrative tasks, including obtaining no objection certificates (NOCs) for expat employees. NOCs are formal letters from employers stating that they do not object to the relevant employee doing certain activities in the country, such as getting a driver’s license, opening a bank account, or even getting a mortgage.
6. Employment Agreements
Employment agreements in the Middle East are also distinctive. There are two types of employment agreements used in the Middle East. One is a template agreement, which is a government form filed at the same time of a visa application. Examples include the UAE’s Ministry of Human Resources and Emiratisation (MoHRE) agreement and template employment agreements available in Saudi Arabia’s Qiwa portal.
Employers must submit a government-issued template agreement when applying for employment visas. However, they often supplement these template agreements with more detailed private employment agreements that include additional protections and clauses not covered in government forms. These robust agreements include the provisions one might see in a typical employment agreement, such as intellectual property rights, more detail and context on noncompetition agreements, the obligation to return company property when employees leave, statutory benefits, and provisions regarding the handling of trade secrets.
7. Statutory Benefits
The Middle East offers several unique statutory benefits. In addition to statutory annual leave and statutory maternity leave, the Middle East often has requirements for Ramadan hours and Hajj leave. For example, during Ramadan, all employees, regardless of their religion, are entitled to reduced work hours. Muslim employees are also entitled to Hajj leave for their pilgrimage to Mecca.
8. Termination Procedures
The processes around terminating the employment of expat employees can vary from country to country in the Middle East. One universal feature among many countries in the Middle East is an end-of-service gratuity. These gratuities are a significant benefit for expats, serving as a quasi-pension that accrues over their employment period and is paid out upon termination, regardless of the reason for leaving.
Another feature of terminations in the Middle East is the cancellation of employees’ visas. In the UAE, even when transferring between employers, the current employer must cancel the visa before the new employer can apply for a new one. This process includes obtaining a clearance form to ensure all statutory payments are settled.
Key Takeaways
The Middle East presents a unique landscape for global employers, with specific requirements and cultural nuances that must be navigated carefully. From setting up a physical presence to understanding workweek structures, tax implications, local national hiring rates, and statutory benefits, there are many factors for global employers to consider.

Supreme Court of Ohio Affirms Denial of Healthcare Service Provider’s Commercial Activity Tax Refund Claim

The Supreme Court of Ohio upheld the denial of Total Renal Care, Inc.’s (“TRC”) refund claim of Ohio Commercial Activity Tax (“CAT”) that it paid on services that it performed outside of Ohio. Total Renal Care Inc. v. Harris, Slip Op. No. 2024-Ohio-5685 (Ohio Dec. 9, 2024).
The Facts: TRC, a subsidiary of DaVita, Inc., provides dialysis to patients with kidney disease and end-stage renal disease. Dialysis treatments are administered at locations throughout the United States, including in Ohio. In addition to dialysis services, TRC provides laboratory testing services and administrative services, such as back-office support, data processing, and procuring medical equipment and supplies. TRC conducts these services in a number of states outside of Ohio. 
For the years at issue, TRC originally paid CAT on all gross receipts it received from locations in Ohio where dialysis was provided. TRC subsequently filed refund claims and asserted that a portion of those gross receipts were related to its laboratory and administrative services, which were performed outside of Ohio. 
The Ohio Tax Commissioner denied TRC’s refund claims, and the Ohio Board of Tax Appeals (the “Board”) affirmed. TRC appealed the Board’s decision to the Supreme Court of Ohio. 
The Law: The CAT is imposed on “each person with taxable gross receipts for the privilege of doing business in [Ohio].” The statute defines “taxable gross receipts” as receipts with an Ohio situs and provides that receipts from services are sitused to Ohio in the proportion that the purchaser received the benefit of the service in Ohio.
Ohio’s Administrative Code governing situsing receipts provides “the physical location where the purchaser ultimately uses or receives the benefit of what was purchased is paramount in determining the proportion of the benefit received in Ohio.” The Administrative Code lays out a standard specific to healthcare services, which indicates that gross receipts from healthcare services are sitused to Ohio if the healthcare services are performed there.
The Decision: The Supreme Court of Ohio ultimately affirmed the Board’s decision, concluding that patients who received TRC’s dialysis treatment in Ohio received the benefits of such treatment there. The court focused its analysis on TRC’s provision of dialysis because TRC conceded that “the only service it provides to its patients is dialysis[.]” And it admitted that the laboratory and administrative functions “exist solely for its provision of dialysis services to patients in Ohio.” The court found that TRC’s laboratory and administrative services were not provided on a stand-alone basis and were only ancillary to providing dialysis treatment. Thus, the court concluded that the gross receipts at issue were from the provision of dialysis services, not the provision of dialysis, laboratory, and administrative services. 
The court analyzed the facts under both the statutory language and the administrative rules and concluded, under either application, the result was the same. In applying the statute, the court stated “[w]hen determining the location to which gross receipts should be sitused, the taxing authority must look at the location where the purchaser benefited from the purchased service,” and indicated that the purchaser’s physical location is “paramount” to this inquiry. Applying this interpretation to TRC’s facts, the court held that patients who received dialysis in Ohio benefited from such treatment there. In applying the administrative rules, the court stated “if a healthcare service is provided entirely in Ohio, then the entirety of the receipts for that service are sitused to Ohio.” Applying this interpretation to TRC’s facts, the court held that the healthcare service TRC provided was dialysis and such service was provided entirely in Ohio. 
Accordingly, the court held that TRC’s gross receipts it received from locations in Ohio where it provided dialysis should be sitused entirely to Ohio.