Strategizing International Tax Best Practices – by Keith Brockman

Archive for December, 2018

US: The BEAT goes on

Complex new guidance continually is rolling off the press for scrutiny, especially for year-end compliance.  EY’s Global Tax Alert provides a summary of recent developments,  references to IRS Notice 2019-01, IRS FAQ’s, and Proposed Regulations for BEAT are provided for reference.

Highlights:

  • Proposed BEAT Regulations provide certainty re: Service Cost Method payments and the mark-up component that would be includable. BEAT is not limited to cash payments, and would also include amounts paid or accrued using any other form of consideration including property, stock or the assumption of a liability.
  • Notice 2019-01 was issued to address the rules for repatriations, generally arising from Sec. 959(c)(1), (2) and (3) in that order based on a LIFO approach.  Compliance complexity has expanded significantly, demanding more time from multinational tax departments that will require added resources, technology demands and external advisor costs.
  • A new House Ways and Means tax package was introduced Dec. 10th, preserving the (correct) notion that tax year 2017 overpayments would not exclusively be attributed to the deemed repatriation tax without offset to 2018 regular tax liability.    The package would also provide technical guidance for downward attribution rules.
  • IRS FAQ’s have been updated, attached for reference.
  • The IRS on 13 December issued proposed regulations (REG-132881-17) under Code Sections 1471–1474 (FATCA) and Sections 1441–1461.
  • The Organisation for Economic Co-operation and Development (OECD) will release a major update on its work on the taxation of the digital economy at the end of January 2019, according to Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_14_December_2018/$FILE/2018G_012449-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2014%20Dec%202018.pdf

https://www.irs.gov/pub/irs-drop/n-19-01.pdf

https://www.irs.gov/pub/irs-drop/reg-104259-18.pdf

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns

GILTI Reg’s: TEI’s response

The Tax Executives Institute (TEI) provided insgihtful comments to the recently issued GILTI Proposed Regulations, addressing the following main points:

  • Proposed regulation section 1.951A-3(h)(1) (the “temporarily held property rule”) provides that temporarily held property acquired with “a principal purpose” of reducing a U.S. shareholder’s GILTI inclusion will be disregarded
  • Basis adjustment rule for tested losses
  • Only used tested losses should increase Subpart F E&P
  • Basis reductions should only apply to actual transfers of stock
  • Deemed Sec. 367(d) expense should reduce tested income
  • Prop. Reg. § 1.951A-2(c)(5) anti-abuse rule (and authority to issue such rule)

TEI’s comments are well reasoned and should be reviewed to further understand the complexities, and need for added clarification going forward.

 

https://www.tei.org/sites/default/files/advocacy_pdfs/TEI%20Comments%20-%20Proposed%20GILTI%20Regulations%20Section%20951A%20-%20FINAL%2026%20November%202018.pdf

Proposed FTC Reg’s: Not simple

Links to the proposed Foreign Tax Credit Regulations, and EY’s detailed Global Tax Alert, are provided for reference.

To the extent there are perceived favorable items, (i.e. including GILTI income and stock as subject to exemption rules), there are unfavorable items (i.e. exemption rules also affecting the FDII calculation and overall complexity).

From a multinational company perspective, these complex rules require almost immediate application for financial statement purposes while regular tax compliance/provision systems struggle to catch up.  Thus, new technology will be required to prepare non-intuitive calculations that are still uncertain for many to fully comprehend and apply.

https://www.ey.com/Publication/vwLUAssets/US_Treasury_issues_highly-anticipated_proposed_foreign_tax_credit_regulations/$FILE/2018G_012314-18Gbl_US%20Treasury%20issues%20highly-anticipated%20proposed%20foreign%20tax%20credit%20regs.pdf

https://www.irs.gov/pub/irs-drop/reg-105600-18.pdf

US Sec. 163(j): Guidance/complexity

The IRS recently released Proposed Regulations on Section 163(j): an interest limitation that is applicable for the calculation of Global Intangible Low-Taxed Income (“GILTI”) under the US Tax Act (“TCJA”).  A copy of the Proposed Regulations are provided for reference, highlighting some areas of clarity/surprise.  Comments are due within 60 days of publication in the Federal Register, with a public hearing set for Feb. 25, 2019.

  • Former Proposed Regulations for Sec. 163(j), never finalized, are withdrawn
  • Proposed Regulations may be elected for 2018
  • General rule-Same as C corp; election (alternative method) for a CFC group
  • One limit for a consolidated group (affiliated, non-cons. group, or partnership n/a)
  • Adjusted Taxable Income (“ATI”) requires an adjustment for:
    • Capitalizable Sec. 263A costs re: inventory/sales  
    • sales/dispositions of certain property
    • Sec. 78 gross-up, Sec. 951(a) Subpart F, Sec. 951A GILTI, Sec. 250(a)(1)(B) deduction, without regard to Sec. 250(a)(2) limitation, related to GILTI
  • Upper tier CFC members include “excess interest” of lower tier CFC’s
  • Further guidance re: ordering of Code provisions, including BEAT, will be issued
  • A “new” definition of interest is provided, including:
    • Sec. 1275(a) and Reg. Sec. 1.1275-1(d) instruments
    • Factoring income
    • OID
    • Accrued market discount
    • Guaranteed payments of Sec. 702(c)
    • Income/loss re: hedges of interest-bearing assets/liabilities
    • Swaps, separated into a loan and payment swap (collateralized swap n/a)
    • Commitment fees
    • Debt issuance costs
  • Anti-avoidance rule
  • Sec. 382 attribution for pre/post-change periods
  • Sec. 381 includes the attribute for disallowed interest expense carryovers
  • No effect on E&P
  • Sec. 163(j) limit at partnership level
  • Intercompany CFC debt is included as interest income and expense, thus resulting in a net -0-; other debt will be a net adjustment to be allocated to separate CFC’s
  • New Form 8990 will be required

The most contentious items, as noted in recent days, are the adjustment of Sec. 263A depreciation (thus a factory does not add back depreciation in EBITDA), add back of Sec. 78, Sec. 951(a), Sec. 951A as reduced by the relevant Sec. 250 amount, complexity including excess ATI adjustments, and the new definition of interest, which includes interest equivalent instruments/transactions that will be included as a potential limitation.

The 439 pages require several readings for a general comprehension, aided by webinars and summaries from various advisory firms.

https://www.irs.gov/pub/irs-drop/REG-106089-18-NPRM.pdf

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