The Final Reg’s for Section 250, used in FDII and GILTI calculations, have been finalized. These Reg’s are now undergoing analyses in trying to understand the complexities and nuances. Some highlights include:
The Final Reg’s are effective for tax years beginning on or after 1/1/2021, although they can be applied retroactively in their entirety
General relaxation of the FDII documentation requirements
Formal ordering rules for interaction with other Code sections are reserved in the Final Reg’s
Final Reg’s require deductions to be apportioned to gross DEI and gross FDDEI without regard to the limitations in Sections 163(j), 170(b)(2), 246(b) and 250k, that may cause a mismatch in the deductions allowable for taxable income
Final Reg’s apply the exclusive geographic apportionment rule of Treas. Reg. Section 1.861-17(b) for purposes of apportioning R&E expenses to gross DEI and gross FDDEI
The Final Reg’s provided additional clarity, although a taxpayer will have to consider if the Proposed Reg’s or Final Reg’s will be favorable for tax years prior to 2021.
EY’s Tax Alert provides additional details, as referenced.
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
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.
As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law. “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.” The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”
EY’s Global Tax Alert is provided for added reference.
US has communicated its concern to France regarding its Digital Services Tax
US TCJA Section 250 final regulations will include guidance on “end-user” conformity and FDII documentation
The IRS may use the new Advance Pricing and Mutual Agreement Program (APMA) Functional Cost Diagnostic Model released last February in examinations in appropriate cases, according to an IRS official this week
GAO urged the IRS to develop a “comprehensive plan for managing efforts to leverage FATCA data in agency compliance efforts
The Organisation for Economic Co-operation and Development’s Forum on Tax Administration (FTA) announced a second pilot of the International Compliance Assurance Program (ICAP 2.0). A new handbook that will guide the second pilot was also endorsed and published by the FTA. ICAP is a voluntary risk assessment and assurance program designed to facilitate open and cooperative multilateral engagement between multinational enterprise (MNE) groups willing to engage actively and transparently and tax administrations in jurisdictions where the MNEs have business activities.
Additional guidance, tax exam techniques and risk assessment are still very much in process in an effort to reduce uncertainty and provide faster resolutions to tax audits. EY’s Global Tax Alert provides additional details 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.
EY’s Global Tax Alert provides the latest US updates, noting the following:
Regarding the TCJA’s foreign derived intangible income (FDII) provision, a Treasury official was quoted as saying the Government is actively looking at how to apply the disqualification for related-party services that are substantially similar to services provided by the related party to US taxpayers.
A senior IRS official said the legislative history and the purpose of the provision strongly suggests that the Internal Revenue Code Section 78 GILTI gross-up should be placed in the GILTI basket. The official conceded that that interpretation is not in the statute, however.
Reflecting on the base erosion anti-abuse tax (BEAT), the official said Treasury is presently undecided if including a markup disqualifies the entire charge or just the amount of the markup for related-party services, that otherwise qualifies for the services cost method exception.
The noted highlights are very critical in estimating the impact on financial statements, as well as compliance and planning opportunities. To the extent timely guidance is not provided this year, there will be additional uncertainties in how to measure the effects of the complex Tax Act provisions.
The Tax Executives Institute, Inc. (TEI) previously issued excellent comments regarding divergent views of the Big 4 accounting firms for US GAAP tax accounting issues for the new US Tax Act aspects.
These views are still divergent today as we approach the end of March, and further issues continue to develop that impact the cash tax and tax reporting aspects for the US Tax Act. Accordingly, the same facts may provide a different repatriation tax liability and tax accounting for different multinational companies, certainly a difficult variable for comparison by tax experts and, most importantly, by investors.
As these positions may continue to diverge, position papers and discussions with the audit firm, Audit Committee of the Board of Directors and the company should be scheduled to ensure there are no surprises as earning release dates are emerging.
The latest US / OECD developments are detailed in the referenced EY Global Tax Alert, highlighting a potential second tax bill (apart from technical corrections), status on the “Blue Book: by the Congressional Joint Committee on Taxation, Q&A IRS release re: Section 965 including how to pay the first estimate and report on the US federal income tax return, anti-corporate inversion regulations, and OECD’s Interim Report of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), titled “Tax Challenges Arising from Digitalisation.” Additionally, OECD released the third batch of peer reports – Certainly an exciting and challenging time!
There are still many areas of debate and room for reasonable interpretation on major aspects of the US Tax Act, especially as the 2018 provisions of BEAT, FDII and GILTI are not encased within the one-year measurement period of SAB 118. For companies subject to Q1 reporting, these uncertainties should be aligned with the auditor to avoid last-minute debates for material items.
EY’s Global Tax Alert summarizes recent US developments, including (expected) pushback by the EU from the Tax Act’s FDII legislation. The pushback is based upon WTO rules and OECD’s Article 24 on non-discrimination.
One elemental argument against the Foreign Derived Intangible Income (FDII) legislation is that it violates the World Trade Organization (WTO) rules.
“The tax press is reporting that the EU has requested that the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices conduct a “fast track” review of certain of the TCJA’s provisions. The request reportedly came after a meeting of EU Finance Ministers in which the Ministers discussed how to react to the tax reform law and whether to take action in the WTO. According to the report, a recent EU document states that the new base erosion and anti-abuse tax may contravene the OECD Model Tax Convention’s Article 24 on non-discrimination.”
To the extent that the FDII is found to violate the WTO rules, the timing for this benefit is a short-term (i.e. 3-5 years) period. Accordingly, relevant restructuring may avail this benefit in the next few years with a long-term strategy based on its revocation.
EY’s referenced Global Tax Alert shares Treasury’s position on pending updates, as well as the European Commission (EC) questionnaire being developed for the FDII incentive of the US Tax Act.
The GILTI provision of the Tax Act is admittedly very complex, even more so by the legislation that it is to be computed on a shareholder legal ownership chain basis, vs. consolidated group basis as the transition tax. This may produce non-intuitive results, and Treasury should provide an update in 4-6 weeks on this point. However, for purposes of calculating the annual effective tax rate for the first quarter, a taxpayer may need to be ready for calculation on a shareholder and group basis for timely preparation and reporting.
As expected, the European Commission is preparing questionnaires to multinationals to gauge the impact of the FDII. This particular provision was envisioned as being a driver of opposing international views and analyses. This provision is important to monitor going forward, as well as not putting reorganization structures in place that cannot be reversed if this provision would be repealed.
Finally, the deemed repatriation transition tax is not expected to change significantly. However, there is not universal certainty about the ability to deduct pro-rata foreign taxes on a November 2 calculation, vs. Dec. 31, for a foreign corporation.