Final and proposed Foreign Tax Credit (FTC) regulations are in review by OMB’s Office of Information and Regulatory Affairs.
These regulations join the pending BEAT regulations in OIRA.
We should expect both sets of regulations in the very near future.
As news of final Base Erosion and Anti-abuse Tax (BEAT) regulations are to be released by OIRA and issued, there are also new proposed BEAT regulations to accompany them.
So, the BEAT goes on, while everyone is still awaiting final foreign tax credit regulations.
As we are approaching the end of the third quarter, this may be a significant development to digest for material changes to the proposed regulations, in addition to some unknowns and uncertainties.
As 2019 year-end is quickly approaching, there are important items of legislation still pending, including the following:
- US Tax Act (TCJA) technical corrections, including the ability to apply transition tax overpayments (several Republicans and Democrats have already agreed to sponsor a relevant bill), and CFC downward attribution rules
- Tax extenders, including the important look-through rules for CFC’s, which expires at the end of this year
- Additional tax treaties will be reviewed, following the recent ratification of Spain and Japan treaties with the US
- Final BEAT regulations, with new proposed regulations in some areas
- Section 163(j) rules for application to CFC’s
- GILTI high-tax exclusions
- Final foreign tax credit regulations
- Section 245A dividends received deduction regulations
- FDII and anti-hybrid regulations
The above items are important as stand-alone items, and represent a significant amount of regulations to absorb prior to year-end if they can be issued this year.
These changes may significantly impact the annual ETR of multinationals in the fourth quarter, as well as introduce new TCJA concepts into treaties and complex Limitation of Benefit (LOB) clauses therein.
The TCJA complexities, and interpretations thereto, continue this year and next, posing compliance and planning uncertainties going forward.
EY’s Global Tax Alert provided additional details, as referenced.
IRS and Treasury released, on June 14th, a set of proposed and final Regulations on GILT, in addition to Temporary and Proposed Regulations on Section 245A that relate, partly, to GILTI. A copy of the proposals are provided for reference, with some highlights to date:
- REG 106282-18 is a Notice of proposed rule making with temporary regulations that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations (CFCs). Per the Notice, “only small U.S. taxpayers with fiscal year CFCs that transfer assets in related party transactions during the gap period, or U.S. taxpayers that transfer more than 10 percent of their stock of a CFC in a taxable year or U.S. taxpayers that reduce their ownership of stock of a CFC by more than 10 percent, have the potential to be affected by these regulations.”
- REG 101828-19, Notice of proposed rule making re: domestic partnership treatment ( adopting an aggregate approach), and proposed GILTI regulations for gross income subject to a high rate of foreign tax. Note the GILTI final regulations adopt the GILTI high tax exclusions of the original proposed regulations without change, however the proposed regulations would allow an expanded election whereby the high-tax determination is made at the QBU level. An election made with respect to a CFC applies with respect to each high-taxed QBU of the CFC, and a U.S. shareholder must make the same election with respect to each of its CFCs. This high-tax change would apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register.
- TD9865, Final temporary regulations under Section 245A
- TD9866, Final and temporary regulations re: GILTI guidance, pro-rata shares of Subpart F income and certain foreign tax credit provisions. Note that future guidance is reserved re: allocation and apportionment of expenses for the foreign tax credit limitation under Section 904.
- Future guidance is expected to clarify that Sec. 250 does not apply to CFCs as an allocable deduction
- Final regulations retain the current GILTI high tax exclusion, noting that the rules prescribed by a separate notice of proposed rule making for an expanded exclusion cannot be used until the relevant regulations are effective.
- De minimis and full inclusion rules are clarified
- The effect of a qualified deficit or a chain deficit in determining gross tested income is disregarded, and the final regulations are revised accordingly
- Final regulations retain the tested loss QBAI exclusion, although there is a reduction to tested interest expense of a CFC for a “tested loss QBAI amount”
- Final regulations retain the netting approach for determining specified interest expense, with certain modifications
- Final regulations define “interest expense” and “interest income” by reference to Section 163(j)
- Rules for basis adjustment of tested loss CFCs will be a separate project
The regulations/notice of proposed rule making are extensive, complex and represent over 500 pages of guidance, although certain provisions and clarifications represent favorable rules based on comments received.
The rules clarify current law, comments received and explanations why they were, or were not, considered. Thus, a detailed review refreshes such insights into the long history of the international tax provisions.
Final Section 956 Reg’s have been issued, reducing the Section 956 inclusion by an equivalent amount that would have been eligible for the Section 245 dividends received deduction.
Final GILTI Regulations will be issued by June 22, thereby providing retroactivity to the effective date of the TCJA.
Final BEAT Regulations will also be issued by the end of summer, although not soon enough for retroactive effect.
EY’s Global Tax Alert provides additional details, for reference.
As Final Regulations are in process, TEI’s practical and thoughtful comments were submitted re: the proposed Section 250 Regulations. A copy of the comments are provided for reference, with highlights including:
- Determination of domestic and foreign use are impractical rules for which a multinational company will find difficult to effectively implement. A seller’s shipping address would be an alternative solution
- Long-term supply contracts may be difficult to obtain new documentation annually, thus such documentation of the initial contract should suffice
- Business Service provisions have rules that will prove difficult to obtain, workable rules should be designed and implemented
- Effective date of the final regulations should be tax years beginning at least one year after the date of publication, to allow time for system changes
- Final section 250 regulations should provide that the exploitation of manufacturing and supply chain IP is a foreign used service, consumed at the place of manufacture, if it meets the physical transformation and proximity requirements outlined in the regulations
- Advance payments of section 451 are to be related to the timing for related cost of goods sold amounts to prevent distortion
Final regulations clarify where the charitable contribution deduction limitation fits in the ordering rule, along with sections 163(j), 172, and 250.
- Prop. Treas. Reg. § 1.250(b)-1(d)(2) provides that the exclusive apportionment rules in Treas. Reg. § 1.861–17(b) do not apply, this provision is a disincentive and should be changed
Alot of regulation activity is taking place, in advance of the June 22nd date that would allow provisions of the Tax Act to be retroactive to date of enactment. Additionally, the regulations will clarify tax return reporting for calendar year US-based multinationals.
The IRS issued final regulations (T.D. 9857), effective 13 May 2019, that address the recognition and deferral of foreign currency gain or loss with respect to qualified business units (QBUs) subject to Section 987 (Section 987 QBUs) in connection with certain QBU terminations and other transactions involving partnerships.
The IRS released, on 17 May, proposed regulations under Sections 954 and 958 on the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). The IRS also released proposed regulations that provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business in computing foreign personal holding company income.
Eagerly-anticipated final GILTI regulations moved closer to release this week, having been received for review by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) on 16 May.
Proposed regulations under Sections 951(b) and Section 951A were also sent to OIRA for review on the same day.
In addition, interim final regulations under Sections 91 and 245A were received by OIRA on 15 May.
EY’s Global Tax Alert provides details on the above actions, for reference.