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.
The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of final and temporary foreign tax credit (FTC) regulations on 29 October, including R&D expense allocation. These rules are imminent.
Final Sec. 385 regulations were issued, removing the final documentation requirements
Sec. 385 Advance Notice of Proposed Rulemaking was issued re: Distribution Regulations
The Congressional Joint Committee on Taxation staff released the General Explanation of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19) on 31 October. Colloquially known as the Blue Book, the publication includes a description of all tax legislation enacted in the 115th Congress, with the exception of the 2017 Tax Cuts and Jobs Act (Public Law 115-97), which was covered in a separate General Explanation released in December 2018.
A Brexit extension was approved this week, with the UK’s Article 50 period (after which the UK will leave the EU) legally extended by the EU until 31 January 2020.
EY’s Global Tax Alert provides more details, with a reference link.
The FTC regulations, to be issued in final and proposed form, will be complex, long and will provide certainty, as well as more questions into this complex area.
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.
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.
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:
Cash position definition
Foreign Tax Credit, double-counting of Earnings & Profits
Dividends paid from a CFC to another CFC or a third party
Hovering deficit taxes
Stock basis election should be extended to 180 days, vs. 90 days per IRS guidance
Changes in methods of accounting
CFC attribute mismatches
Foreign tax credit adjustment
“Applicable percentage” guidance
Average FX rate, vs. year-end spot rate, used for measurement
2017 overpayments applied automatically to transition tax (Still an issue!)
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.