Strategizing International Tax Best Practices – by Keith Brockman

The review of these regulations by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) review is progressing, with over 500 pages of proposed regulations to be released publicly this week.

Lafayette G. “Chip” Harter III, Treasury deputy assistance secretary for international tax affairs, provided comments on Nov. 9 at the Federal Tax Conference sponsored by the University of Chicago Law School.

The business interest expense limitation, currently applied by many at the individual CFC level, would be determined on a look-through method, with net external interest calculated at the CFC group level and allocated to CFC’s, with a tiering-up approach.

The proposed Reg’s will be very complex and long, with over 500 additional pages of BEAT, FTC, etc. also to be issued later this month.

 

IRS recently published proposed regulations under Section 956 (deemed dividend provision), with both good and bad news in further alignment with the US Tax Act enacted at the end of 2017.  At that time, it was hoped that Section 956 would be abolished, but a late-breaking change in the final law was put in place for Section 956 to remain.  This update achieves parity with the participation exemption system provided for dividend distributions.

  • Good news: Corporate US shareholders are excluded from the application of Section 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and effective repatriations.  Thus, the amount otherwise determined under Section 956 is reduced to the extent that the US shareholder had received a distribution qualifying for a Section 245A deduction from the CFC in an amount equal to the Section 956 amount.  (i.e. the distribution still needs to be a dividend)
  • Bad news: Section 956 is still in the Code, along with potential direct/indirect tax consequences from guarantees, loans, etc.  To the extent such amount is not a “dividend” for US tax purposes, there are traps still present to warily avoid.

There are planning opportunities (i.e. tax consequences from a loan vs. an actual dividend, etc.), however there are also traps to avoid, so it is safe to assume that diligence is still required for this Code section. 

A reference to the proposed Regulations are provided for reference.

https://www.irs.gov/pub/irs-drop/reg-114540-18.pdf

 

 

The Australian Tax Office (ATO) has published guidelines addressing general anti-avoidance rules (GAAR) for restructures of hybrid arrangements.

This guidance is a valuable reference for taxpayers not only operating in Australia, although having hybrid arrangements that may need restructuring.

https://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Office_issues_guidance_on_GAAR_and_restructures_of_hybrid_mismatch_arrangements/$FILE/2018G_011633-18Gbl_Australia%20-%20Guidance%20on%20GAAR%20and%20hybrid%20mismatches.pdf

https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20187%2FNAT%2FATO%2F00001%22

Alot of guidance is virtually rolling off the press!

  • PTI guidance for year-end financial statements
  • Foreign tax credits, including application of GILTI
  • Section 163(j) interest guidance
  • Proposed regulations on PTI application
  • BEAT
  • Section 250 guidance

The guidance will be complex and lengthy, and it represents only one step towards achieving more certainty into the complex nuances of the US Tax Act.  EY’s Global Tax Alert provides a summary for reference.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_19_October_2018/$FILE/2018G_011433-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20Oct%202018.pdf

The Tax Executives Institute (TEI) has provided numerous comments re: Sec 965 positions as written in the law, supplemented by additional guidance.

Summary of comments:

  1. Cash position definition
  2. Foreign Tax Credit, double-counting of Earnings & Profits
  3. Dividends paid from a CFC to another CFC or a third party
  4. Hovering deficit taxes
  5. Stock basis election should be extended to 180 days, vs. 90 days per IRS guidance
  6. Changes in methods of accounting
  7. Anti-abuse rules
  8. CFC attribute mismatches
  9. Foreign tax credit adjustment
  10. “Applicable percentage” guidance
  11. Average FX rate, vs. year-end spot rate, used for measurement
  12. 2017 overpayments applied automatically to transition tax (Still an issue!)
  13. Penalty protection

The letter provides background and examples related to the comment areas, and should be reviewed to gain a further understanding of the complex dynamics that will hopefully be mitigated via the suggestions.

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI-Comments-Proposed-Section-965-Regulations-9%20October-2018.pdf

US int’l tax update

The latest US tax updates are summarized in EY’s Global Tax Alert, with a referenced link

  • Tax Reform 2.0: House is moving forward with three separate bills, hoping at least one will pass, although Senate will not review prior to Nov. midterm elections
  • GILTI: Additional rules re: interaction of Foreign Tax Credit and GILTI by Dec. 31, 2018  (It is hoped that the calculation of Sec. 163(j) interest limitations will be addressed re: application on a separate CFC basis, consolidated basis, or other method)
  • GILTI: Final regulations June 2019
  • IRS plans to establish separate webpages for the major international tax provisions enacted by the 2017 tax reform to provide informal taxpayer guidance. The webpages will follow a similar format that was adopted by the IRS to offer informal information regarding the TCJA’s transition tax.
  • IRS: Restructuring the Advance Pricing and Mutual Agreement program (APMA) to consolidate resources and improve internal processes, including economists.

There is still significant uncertainty re: Sec. 965 repatriation tax, GILTI, FDII and BEAT provisions by taxpayers.  It is hopeful that meaningful guidance will be issued shortly.      

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_28_September_2018/$FILE/2018G_011226-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2028%20Sept%202018.pdf

OECD update: CbC reporting

OECD has updated guidelines for several aspects of Country-by-Country (CbC) reporting, including:

  • Dividends included in pre-tax book income
  • Definition of revenues and taxes paid
  • Aggregate data in one jurisdiction/eliminations
  • Accumulated earnings/loss
  • Treatment of major shareholdings / ownership by multiple groups
  • Short accounting periods
  • Parent surrogate filing

As the 2017 CbC report is almost due for US calendar-year taxpayers, it is imperative to review the OECD guidelines to ensure year-to-year consistency, with relevant statements attached for transparency.

A link to the guidelines is attached for reference.

http://www.oecd.org/tax/beps/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

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