Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

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  • Former Proposed Regulations for Sec. 163(j), never finalized, are withdrawn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.

Click to access REG-106089-18-NPRM.pdf

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Poland: WHT cash leakage

Effective 1/1/2019, dividends, interest, and royalty payments from Poland will meet higher tax rates, and timing/permanent differences based on a “pay and refund” system.

Statutory tax rates of 19%/20% will be applicable, unless certain pre-conditions are applied for, which may not be certain or provided timely.

These provisions will impact current cash flows with potential adverse consequences on the annual ETR, resulting in additional proactive actions (i.e. providing statements for lower withholding no later than early January, etc.) to mitigate such actions to the extent possible.

EY’s Global Tax Alert provides additional insight on this significant development for multinationals.  Hopefully, other countries will not “follow the leader” by enacting similar actions.

Click to access 2018G_011959-18Gbl_Poland%20-%202019%20tax%20reform%20including%20strict%20withholding%20tax%20regime.pdf

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US Sec. 163(j): Proposed Reg’s to apply a look-through approach

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.

 

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US Section 956 Proposed Reg’s: Traps & Opportunities

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.

Click to access reg-114540-18.pdf

 

 

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Hybrid arrangements: ATO guidance

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.

Click to access 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

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US guidance: Ready, set, go!

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.

Click to access 2018G_011433-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20Oct%202018.pdf

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Sec. 965 Repatriation: TEI comments

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.

Click to access TEI-Comments-Proposed-Section-965-Regulations-9%20October-2018.pdf

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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.      

Click to access 2018G_011226-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2028%20Sept%202018.pdf

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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.

Click to access guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

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GILTI: Proposed Reg’s-partial answers

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.

Click to access reg-104390-18.pdf

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TP: France = OECD+

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.

 

https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-tp-france-tpdoc.pdf?elq_mid=13079&elq_cid=1272441

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OECD peer reports: Valuable insights

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.

http://www.oecd.org/tax/beps/oecd-releases-fourth-round-of-beps-action-14-peer-review-reports-on-improving-tax-dispute-resolution-mechanisms.htm

 

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US int’l developments

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.

Click to access 2018G_010907-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2024%20August%202018.pdf

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EU exporter: New definition

The European Commission has recently amended the definition of “exporter” for EU purposes.  The new definition allows greater flexibility, although still postulates that non-EU established companies may not act as an EU exporter.

Article 1(19) of the UCC DA now requires a company that wants to act as an “exporter,” to be a person established in the EU customs territory and:

  • Has the power to determine that the goods are to be brought outside the customs territory of the Union

     

    or

  • Is a party to the contract under which goods are to be taken out of that customs territory

In summary, the EU supply chains should be reviewed re: whom is acting as an exporter, as well as how the new rule may simplify such actions.

EY’s Global Tax Alert provides additional details for this important change:

 

Click to access 2018G_010770-18Gbl_Indirect_EC%20amends%20definition%20of%20exporter%20in%20the%20EU.pdf

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US int’l tax developmentsUS

Significant tax developments have recently transpired for US / international tax.

  • Section 965 Proposed Regulations have been issued, including discussion of potential stock basis elections that are critical to review (reference link).
  • Proposed Regulations issued for capital expensing provisions of US Tax Act (reference link)
  • IRS has published its statutory interpretation of their previously issued FAQ Q&A that 2017 overpayments of federal income tax are allocated solely to transitional tax liability in its entirety prior to allocating such amount to its 2018 federal income tax liability without transition tax.  In summary, the reasoning is that the transition tax is a 2017 liability, notwithstanding the ability to make an election to pay in installments. Considerable debate is currently ongoing re: this latest development, as it seemingly obviates the election methodology solely for one instance of overpayments, yet preserving the ability of deferred payments if a prior year overpayment is not present.

  • The Ninth Circuit Court of Appeals has reversed the Tax Court’s holding in Altera v. Commissioner, and upheld a 2003 regulation that requires participants in a cost sharing arrangement (CSA) to treat stock-based compensation costs (SBC costs) as compensable.  The Appellate Court concluded that the regulations were valid under general administrative law principles and that under current law, SBC costs should be treated as shared by participants in a CSA. It is important to note that the Tax Court’s taxpayer-favorable opinion is still precedent and authority for taxpayers located in geographical areas outside of the Ninth Circuit’s jurisdiction.

  • The IRS Foreign Account Tax Compliance Act (FATCA) certification portal is now live. The FATCA Registration System has been updated to allow for the completion and submission of the certification of pre-existing accounts and periodic certifications. The IRS is recommending that all FATCA registered entities should monitor their message board for notifications. The registration system allows for the establishment of an online account for financial institutions to register with the IRS, renew their agreement, and complete and submit FATCA certifications.

EY’s Global Tax Alert discusses some of the latest developments.

Technical and lengthy documentation re: the above highlights will need critical reading and review in the very near future for US / international tax professionals.

Click to access 2018G_010605-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%203%20August%202018.pdf

Click to access 2018-16476.pdf

Click to access 2018-16716.pdf

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