The IRS and Treasury have released Final Regulations (T.D. 9910) on base erosion and anti-abuse tax (BEAT), with a controversial provision of not allowing the ability to decrease previously waived deductions on an amended return or during an exam.
The Regulations, however, do provide the benefit to waive deductions to avoid BEAT.
Treasury is now fairly confident that all TCJA guidance will be finalized by October 1st.
Treasury deputy assistant secretary for international tax affairs, Lafayette G. “Chip” Harter III, recently shared his ambitious agenda, including the following:
Section 901(m) regulations, imminent
Section 163(j) interest, OIRA received proposed regulations February 7th; final reg review is complete
FDII regulations, spring; documentation requirements have been reworked
GILTI regulations, summer
Foreign tax credit regulations and others, in the pipeline
Treaties with Chile, Hungary and Poland; may be reworked, as there are concerns that the BEAT violates Articles 23 (relief from double taxation) and 24 (nondiscrimination) of the U.S. model income tax treaty
Final and proposed Regulations were issued with respect to the Foreign Tax Credit and BEAT. Noting this regulation package collectively amounts to over 650 pages, it will require time and attention to webcasts, etc. to fully understand the breadth of these rules, especially as they may pertain to 2018 and/or 2019.
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.
Tax Executives Institute, Inc. (TEI) recently provided comments to the proposed BEAT regulations, including the following:
Use of services cost methodology should be clarified
A payee’s Subpart F income should be excluded (i.e. avoid double taxation)
Nonrecognition transactions should be excluded
A payor’s recognized loss transaction should not also have BEAT implications
No blended rates
Anti-abuse rule should be clarified
A recomputation approach should be available for NOL taxpayers
The thoughtful comments provide additional context of the intent for the BEAT provisions, and suggestions to carry out the intent of legislation without extending into other transactions that would have been initially thought as not within the BEAT purview.
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.
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.
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
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)
Debt issuance costs
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.
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
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.
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.