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:
- Cash position definition
- Foreign Tax Credit, double-counting of Earnings & Profits
- Dividends paid from a CFC to another CFC or a third party
- Hovering deficit taxes
- Stock basis election should be extended to 180 days, vs. 90 days per IRS guidance
- Changes in methods of accounting
- Anti-abuse rules
- CFC attribute mismatches
- Foreign tax credit adjustment
- “Applicable percentage” guidance
- Average FX rate, vs. year-end spot rate, used for measurement
- 2017 overpayments applied automatically to transition tax (Still an issue!)
- 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.
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.
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.
The proposed Reg’s provide some answers, such as calculating GILT on a consolidated approach, but has punted (subject to later guidance) on GILTI foreign tax credits, the Sec. 250 deduction which also is applicable for the FDII provision, definitive guidance on a separate GILTI basket (although noting its expectation) and application of Sec. 163j re: interest expense.
Complex rules are set forth to determine a particular US shareholder’s portion of GILTI. These rules were necessary as the separate shareholder approach was further clarified as a consolidated calculation which does alleviate unnecessary planning to accomplish that result.
Additionally, anti-abuse provisions were included to combat perceived abuse, some of which have already sparked heated controversy. As an example, a CFC’s tested loss does not represent a loss carryover against future year’s tested income. “Donut hole” planning initiated by many taxpayers has also been reversed by this guidance.
The guidance further confirms that each controlled foreign corporation (CFC)’s income calculation is to be based on the concept of a US tax return and principles approach. Additionally, ADS depreciation is to be used regardless of the acquisition date of the foreign tangible property.
Practitioners will be absorbing this new complexity to change their calculations for Q3 Annual ETR calculations, while also finalizing the SAB 118 one-year period to finalize the Sec. 965 deemed repatriation tax provisions effective in Q4 2017 for a calendar-year taxpayer.
Technical/practical articles and webinars have already started in earnest, as everyone is learning about these new rules simultaneously.
A reference to the proposed Regulations are included for reference.
France has adopted transfer pricing “clarification” requirements, effective for 2018 tax years, that expand beyond OECD’s guidance (i.e. OECD+).
It is important to note that these additional requirements pose a significant burden to multinationals trying to achieve consistency in preparing transfer pricing reports for all countries simultaneously. Thus, additional requirements will require additional processes, cost and compliance demands.
Summary of new items for Master File:
- Description of the main services providers within the group, other than R&D services, re: related human capital, equipment, financial and logistic resources of the inter-company service providers
- Intangible asset strategy, including information on transactions subcontracted to unrelated R&D sub-contractors
- R&D transfer pricing policies
Summary of items for Local File:
- Business objectives, including risks and financing
- Reconciliation of statutory and management accounts used for transfer pricing
Some of the above items will prove to be controversial, especially if they would infer any information that would be confidential and strategic in nature. Hopefully, such concepts will not be a “copy and paste” exercise for transfer pricing requirements in other countries.
PwC’s Tax Insights link provides additional context of this significant development.
The Organisation for Economic Co-operation and Development (OECD) on 30 August released a fourth round of stage 1 Base Erosion and Profit Shifting (BEPS) Action 14 peer reports on improving tax dispute resolution mechanisms. The reports assess each country’s efforts to implement the Action 14 minimum standard.
Valuable insights from these reports can be gained, especially if a taxpayer is under audit where some of these questions/uncertainties may arise. The peer reports are performed on a desk audit basis, with other parties comments considered by OECD.
Some insights are APA rollbacks, granting of MAP in all/certain transfer pricing cases, etc. Reference links are provided.
Reports covering Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugalwere published.
The US Tax Act GILTI regulations are under review, and should be released before the end of Q3, that will require review and incorporation into the annual ETR. The regulations are expected to address a consolidated, vs. separate shareholder, approach for the calculation as well as some guidance re: US expense allocation. EY’s Global Tax Alert summarizes the status of this guidance.
Additionally, guidance was recently released on Sec. 162(m) compensation, also necessitating review for Q3 reporting.
The proposed regulations that were released for Sec. 965, deemed repatriation tax, are expected to be followed up by final regulations by June 2019. The third quarter 2018 marks the end of the SAB 118 period to finalize such amounts, notwithstanding additional guidance in the future. Note, these regulations should provide definitive guidance on some pending items (inclusion of PTI for a E&P deficit foreign corporation; calculation of Sec. 986 gain for Sec. 965b E&P) that may require amending 2017 corporate income tax returns.