WEEKEND INSIGHTS: AI R&D Credit, and Loan Debt Becomes Tax Debt

This is a weekend roundup of Bloomberg Tax Insights, written by practitioners and featuring expert analysis on current issues in tax practice and policy. The articles featured here represent just a handful of the many Insights published each week. For a full archive of articles, browse by jurisdiction at Daily Tax Report, Daily Tax Report: State, Daily Tax Report: International, and Financial Accounting.

This week we look at whether the owner of a nonhuman inventor can claim an R&D credit for expenses associated with the invention, how debt relief can turn into IRS debt, whether the latest OECD proposal is a contradiction of the original BEPS project, and more. We’ll hear from:

• Robert Kovacev of Norton Rose Fulbright on calculating the R&D credit for an AI invention
• Jasen Hanson and John Hackney of Chamberlain Hrdlicka on debt relief becoming debtors’ prison
• Keith Brockman of StrategizingTaxRisks.com on what the OECD, UN, and unilateral legislative initiatives are ignoring
• Bob Willens on non-business tax and the situs of intangible property
• Anthony DaSilva of Davis Malm on IRS warnings for tax-exempt entity retirement plans
• Kate Barton of EY on how tax will remain at the center of the Covid-19 recovery
• Jason Mutarelli of Valuation Research Corp. on goodwill and other intangible asset impairment
• Harold McClure on the transfer pricing issues of shipping companies
• Annalise Fong of Future-Moves Group on the OECD’s latest digital tax proposals
• Rajeev Agarwal of Qatar Navigation QPSC on the OECD’s final guidelines on financial transactions
• Robert Marchant of Crowe on Brexit and questions regarding VAT and customs duty
• Karnik Gulati of Coinmen Consultants on Indian dividend distribution tax (DDT)

Photographer: Luke MacGregor/Bloomberg

Artificial intelligence is now involved in the invention process. The U.S. Patent and Trademark Office doesn’t want to grant patents for an invention by AI. What happens when the owner of an AI algorithm attempts to claim a research and development tax credit? Robert Kovacev of Norton Rose Fulbright examines the issues raised for AI-generated inventions under the current requirements for the R&D credit. Read: Machine Versus the Tax Man: AI Inventors and the Research Tax Credit

Covid-19 debt relief measures are intended to help struggling businesses and individuals, but is debt relief really relief at all? Jasen Hanson and John Hackney of Chamberlain Hrdlicka look at the general tax principle that the discharge of debt results in income to the debtor—even if the debtor ends up with no additional cash in their pocket and owing the federal government—and what taxpayers need to consider before opting for debt relief. Read: Is Debt Relief Really Just a Debtor’s Prison? Federal Tax Consequences of Debt Relief

The global tax community is in a battle of time and will have to come up with a workable solution for taxing multinationals in the digital economy. Keith Brockman of StrategizingTaxRisks.com says the OECD, UN, and unilateral legislative initiatives are narrowly focused on the scope and mechanics of implementing this new “tax” regime without paying the necessary attention to the implications a digital services tax may have on double tax treaties, foreign tax credits, and accounting rules for income tax provisions. Read: Narrow Focus on Digital Taxes Could Mean Cascading Consequences

Vermont National Telephone Co. recently lost a fight to avoid paying capital gain tax to Vermont on its sale of FCC licenses covering areas in upstate New York. Robert Willens walks through the decision and VNT’s failed attempt to establish situs of the licenses in New York. Read: Non-Business Income Allocated to State of Commercial Domicile

The IRS recently issued FAQs on nonqualified deferred compensation plans established under tax code Section 457(b) generally used by tax-exempt entities such as municipalities and other tax-exempt organizations, except for churches and synagogues. Tony DaSilva of Davis Malm outlines the requirements for such plans and common errors to look out for. Read: Tax-Exempt Entity Retirement Plans and the Tax Consequences of Noncompliance

Since the Covid-19 pandemic began, more than 138 jurisdictions have amended their tax laws and regulations to alleviate the economic impact of the crisis. At the Milken Institute’s 2020 Global Conference, Kate Barton, EY Global Vice Chair-Tax, shares why tax—and the tax function—is central to facilitating a global economic recovery and building a more inclusive, sustainable future. Read: Why Tax Was—And Will Remain—at the Epicenter of a Covid-19 Recovery

Few businesses have escaped the impact of Covid-19. Jason Mutarelli of Valuation Research Corp. (VRC) analyzes how to approach business valuations and impairment testing, including potential goodwill impairment. The author looks at the impact on the general market and specific industries. Read: Impairment Barometer: Covid-19 and Goodwill Valuation

Multinational shipping companies—without whom there would be far less transfer pricing—have their own transfer pricing considerations. In a two-part article Harold McClure looks at shipping multinationals and their interest in the changing landscape of international taxation under the OECD efforts to stem base erosion and profit shifting. Read: The Future of Shipping Transfer Pricing—Part 1—Preliminary Considerations and The Future of Shipping Transfer Pricing—Part 2—Benchmarking

As the OECD continues its efforts to find agreement on an international digital tax framework, Annalise Foong of Future-Moves Group provides a view on the challenges that lie ahead. Read: OECD’s Digital Tax Journey: an Unequal Footing

Rajeev Agarwal of Qatar Navigation QPSC looks at the final report on transfer pricing aspects of financial transactions issued by the OECD, and discusses what businesses should check when determining transfer pricing aspect of financial transactions. Read: OECD Final Guidelines on Financial Transactions

Businesses have increased their Brexit preparations as the deadline for the transition period approaches. Robert Marchant of Crowe responds to the most frequently asked questions raised with regard to VAT and customs duty. Read: Getting Ready for Brexit—VAT and Customs Duty FAQs

Karnik Gulati of Coinmen Consultants discusses a significant case whereby the India Tax Tribunal reignites the doused fire regarding dividend distribution tax (DDT) and considers the fundamental question—is DDT a tax on companies or shareholders? Read: India Tax Tribunal Rules on Dividend Distribution Tax and its Interplay with Tax Treaties

Corporate Tax Chat: Denise Bee, Senior Tax Director at Slack

Bloomberg Tax spoke recently with Denise Bee, senior global tax director at Slack Technologies, maker of the ubiquitous business communication platform, about the challenge of changing careers between tax and investment banking, and the growing movement by cities and countries to tax tech companies. Read: Corporate Tax Chat: Denise Bee, Senior Tax Director at Slack

From the Archive

Bloomberg Tax contributors have much to say about the research and development credit—most of it good.

You shouldn’t have to be a corporate giant to benefit from R&D tax breaks. Lloyed Lobo of Boast.AI said the biggest problem with Amazon’s small tax bill is that startups can’t get the same financial boost from the government, because they typically have little or no taxes to offset with credits. The author said R&D incentives should be structured to be accessible to all businesses.

The research and development tax credit can help finance emerging technologies. Yair Holtzman and Joseph Lally of Anchin, Block, and Anchin listed multiple technologies that could be eligible for the credit and outlined requirements to claim the credit.

The life sciences industry sits at the epicenter of the Covid-19 pandemic. KPMG tax practitioners addressed the industry’s supply chain issues, financing and cash flow challenges, and research and development issues, and looked ahead at trends, opportunities, and issues for life sciences companies beyond the immediate disruption of Covid-19.

Beyond Tax

What’s happening outside the world of tax?

Arun Srivastava and Simon Airey, partners at Paul Hastings LLP, take a closer look at recent headlines based on leaked suspicious activity reports filed to the U.S. Financial Crimes Enforcement Network. They argue that the large number of SARs being filed suggests institutions are taking appropriate steps and the anti-money laundering system is working. Read: The FinCEN Files: Don’t Rush to Judgment

The criteria the ABA uses when evaluating federal judges are flawed, and this process resulted in a “highly qualified” ranking of Amy Coney Barrett even though her views are contrary to the ABA’s own stated values, writes Lauren Stiller Rikleen, former president of the Boston Bar Association. She offers recommendations for future change, including ensuring the organization’s objectives are taken into account during judicial evaluations. Read: The ABA Must Include Its Core Values When Ranking Judges

Special purpose acquisition companies, or SPACs, are growing in popularity as many investors are looking to get in the game. Schulte Roth & Zabel LLP attorneys provide an overview of this investment tool and explain the importance of understanding the liquidity profile of what is being purchased and regulatory implications. Read: Investing in a SPAC Requires Understanding of Liquidity, Regulatory Issues

Fox Rothschild partners Mark E. Hall and Michael R. Herz say a flood of expected consumer bankruptcies may have been postponed due to government relief programs, but may still come. Meanwhile, commercial Chapter 11 bankruptcies are indeed rising, they say. Read: What’s Disrupting Bankruptcy Trends Predicted in the Pandemic?

The cannabis industry’s rapid growth presents companies with the need to protect their brands from trademark infringement, and to avoid infringing on the trademarks of others. Four Perkins Coie attorneys explain steps that cannabis companies can take to reduce or avoid trademark difficulties. Read: How Cannabis Companies Can Protect Their Trademarks

Exclusive Content for Bloomberg Tax Subscribers

(*Note: Your Bloomberg Tax login will be required to read the following content.)
On Sept. 21, 2020, the IRS released final and temporary regulations implementing tax code Section 864(c)(8), a provision that was enacted by the Tax Cuts and Jobs Act of 2017 to tax non-U.S. partners who sell their interests in U.S. partnerships engaged in a U.S. trade or business. Ronald Kalungi of Buchanan Ingersoll & Rooney P.C. discusses key considerations for foreign partners and U.S. partnerships affected by these regulations, as well as final regulations under Section 1446(f), which provide a withholding mechanism through which the tax imposed by Section 864(c)(8) is collected.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact Erin McManus at emcmanus@bloombergtax.com.