Compliance and reporting: recent developments …

1 Compliance and reporting : recent developments and issues 1 May 2013. Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party.

2 The views expressed by panelists in this webcast are not necessarily those of Ernst & Young LLP. Page 1 Eighth annual domestic tax conference Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2 Eighth annual domestic tax conference Today's presenters Carolyn Bailey Ellen Berger Jeff Ellsworth Elvin Hedgpeth Minde King Mike Medley Page 3 Eighth annual domestic tax conference Agenda TY 2012 tax return reporting developments : Federal US reporting of foreign operations IRS service center Compliance issues State Taxing authority audits impact on Compliance and reporting Future tax return reporting developments Current developments in how work gets done.

3 Wrap-up Additional Q&A. Page 4 Eighth annual domestic tax conference TY 2012 tax return reporting developments federal Form 8949. Sales and other dispositions of capital assets: New for corporations and partnerships to report sales and exchanges of capital assets Report transactions that would have been reported by corporations and partnerships on Schedule D or Schedule D-1 in prior years Allows IRS and taxpayer to reconcile amounts that were reported on Form 1099-B. or 1099-S (or substitute statement) with the amounts reported on the return File with Schedule D for return including Forms 1040, 1065, 1065-B, 8865, 1120, 1120S, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF, and certain Forms 990-T, but not Form 1041. Page 6 Eighth annual domestic tax conference Other business return reporting issues Schedule M-3 no substantive changes this year for Form 1120 and Form 1065. No separate payment card reporting requirements for gross receipts received via payment card (credit and debit cards) and third-party network payments for Forms 1120, 1120-S and 1065.

4 Principal Business Activity Codes Forms 1120, 1065, and 1120-F . revised and updated Form 1120, Schedule K new questions Form 1065, Schedule B, Schedule K-1 new questions Page 7 Eighth annual domestic tax conference Schedule UTP. reporting threshold: Decrease in asset threshold for reporting uncertain tax positions from assets that equal or exceed $100m to assets that equal or exceed $50m reporting no changes: Part I tax positions taken on 2012 return Part II tax positions taken in a prior tax year (2010 2011) that have not been reported on Schedule UTP on a prior year return Page 8 Eighth annual domestic tax conference Form 8886. New Q&A released by IRS providing guidance on requirements for filing a complete Form 8886. Penalties may be imposed for failure to submit complete disclosure Complete disclosure includes the following: Completed according to the instructions and regulations Describes the expected tax treatment and all potential tax benefits expected from the transaction Describes any tax return protection Describes the transaction in sufficient detail for the IRS to be able to understand the tax structure of the transaction and identify all parties involved Page 9 Eighth annual domestic tax conference TY 2012 tax return reporting developments .

5 US reporting of foreign operations International overview Legislative change Impact on attributes such as E&P, foreign tax credit (FTC), relevance of all attributes not just some Readiness and how comfortable you are with as filed numbers Courts Extraterritorial income (ETI) and the CBS case IRS updates to international forms and changes/updates to regulations Amendment to Reg. Section and Final Regs around use of controlled corporations to avoid Section 304. Forms 5471 and 8858. Page 11 Eighth annual domestic tax conference Revised IRS instructions to Form 5471 . 2012 tax year Revised instructions and revised Form 5471. Extension of the constructive ownership exception to filing Form 5471 for Category 3 and 4 filers under Treas. Reg. Section (e)(4)(iii) and (j)(2)(i), respectively, to Category 5 filers Code Section 6038(a)(4) gives the Secretary authority through issuing instructions to Form 5471 to require reporting by a US person treated as a US shareholder.

6 The extension of the exception can only be applied to Form 5471s filed for years ending 31 December 2012 or later since the exception is added through the Form instructions, which apply starting with the Form 5471 revised December 2012. Page 12 Eighth annual domestic tax conference Form 5471 other changes Expansion of Schedule G. Reportable transactions: Applies to CFCs Need to also file Form 8886. Foreign taxes disqualified under Section 901(m) application Section 909 suspended taxes Keep in mind Section 6501(c)(8) must make sure these questions are correctly answered or risk the statute staying open Page 13 Eighth annual domestic tax conference Form 8858 expanded Schedule G, dual consolidated loss Schedule G question 4. Asks if the foreign disregarded entity (DE) is a separate unit or part of a combined separate unit where the separate unit or combined separate unit have a dual consolidated loss (DCL). If yes, enter the amount of the DCL. Schedule G questions 5a, 5b and 5c Question 5a asks whether the DCL was taken into account in computing consolidated taxable income Question 5b asks whether this was a permitted domestic use of the DCL.

7 Question 5c if it was not a permitted domestic use, asks whether the DCL was used to compute consolidated taxable income as provided under Reg. Section (d)-4; identify the amount contributed to cumulative register (beginning of the year). Make sure DCL certifications are matching what is disclosed on the Form 8858. Page 14 Eighth annual domestic tax conference TY 2012 tax return reporting developments . IRS service center Compliance issues Service center Compliance issues Automated late filed 5471 penalty program Form 1042. Rejection of 1042-S not properly completed Audits of payors and payees by both service centers and international examiners Form 1120-F. Requests for EIN using SS-4, but tax return not subsequently filed 8804. Challenging 1065's where there is some indicia of a foreign partner and no 8804 filed FAQ 18. Remains available for delinquent filings FBARs Page 16 Eighth annual domestic tax conference TY 2012 tax return reporting developments .

8 State State overview State tax revenues have continued to rebound from the financial crisis Combination of spending cuts, some tax increases and increased enforcement has resulted in a more stable fiscal picture Some states have enacted tax cuts, and many governors and legislatures have proposed tax reductions Largest state budget challenge is rising Medicaid costs Medicaid enrollment and cost levels are a major issue for 2013, as state spending related to federal health care reforms comes online State expansions required by federal health reform will create stress in FY 2013 budgets Challenges for corporate tax functions Page 18 Eighth annual domestic tax conference Rate changes for TY 2012. Connecticut Corporate tax surcharge of 20% for 2012 and 2013. Idaho Corporate income tax rate reduced from to for 2012. Indiana Corporate income tax rate reduced from to after 30 June 2012 and before 1 July 2013. Massachusetts Corporate excise tax rate reduced from to Pennsylvania Franchise tax rate reduced from to West Virginia Corporate income tax rate reduced from to Franchise tax rate reduced from to Page 19 Eighth annual domestic tax conference Allocation and apportionment changes for TY 2012.

9 California annual election for single sales factor (SSF) still available for 2012. Minnesota continued phase-in of SSF ( for 2012). New Jersey begins phase-in of SSF (15/15/70% for 2012). New York City continued phase-in of SSF (20/20/60% for 2012). Utah continued phase-in of SSF (2012 = 10 x sales). Virginia begins phase-in of SSF for retailers for tax years beginning on or after 1 July 2012. Virginia continues phase-in of elective SSF for manufacturers Page 20 Eighth annual domestic tax conference Other state developments affecting 2012 returns Combined reporting North Carolina Department of Revenue adopted regulations regarding the Secretary of Revenue's authority to adjust net income or to require a combined return Rhode Island pro forma combined reporting for 2012. Schedule CRS Required Data for Combined reporting Study (part of RI-1120C). Michigan CIT. Michigan CIT replaces the existing Michigan Business Tax (MBT) effective 1. January 2012. 2011 fiscal year filers required to file two short-period returns, one for each tax taxpayers can choose actual or annual method of filing Unitary and combined reporting Elimination of MBT NOLs Elimination of MBT credits ( certificated credits continue if taxpayer elects to continue to file MBT return until credits are exhausted).

10 Page 21 Eighth annual domestic tax conference Other state developments affecting 2012 returns NOLs Colorado limits amount to $250K for 2012 2013. Illinois amended the deduction suspension to allow a deduction not to exceed $100,000, for a tax year ending on or after 31 December 2012 and prior to 31 December 2014. Wisconsin allows combined groups to share pre-2009 net business loss carryforwards incurred by group members, effective for tax years beginning after 31 December 2011, with certain limitations Tennessee related party add-backs Prior to 2012 taxpayers only had to disclose the existence of related party intangible expenses in order to claim a deduction on the excise tax return For tax years ending on or after 1 July 2012, taxpayers are required to file an application requesting permission to deduct intangible and related interest expenses Unless permission is granted, taxpayers will not be allowed to deduct these expenses Page 22 Eighth annual domestic tax conference TY 2012: new state business return electronic filing mandates Taxpayer mandates Colorado corporations and partnerships (any tax return that includes an Enterprise Zone credit).