Pursuant to Final and Proposed Regulations recently published, the high-tax exception would be a “unitary” election for both GILTI and Subpart F.
The election is made annually, and can apply retroactively to post-TCJA years.
In summary, Treasury has adopted some taxpayer comments favorably, while delivering an unexpected result in their guidance.
EY’s Alert provides additional background, with links to the Regulations.
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
The Tax Foundation has provided a useful reference to state law changes, as 35 states have major tax changes taking effect on 1/1/2020.
This is especially important as more states are still interpreting the Tax Act, and any impact for GILTI, Sec. 163(j) interest limitation, etc.
The reference provides a summary by state of the recent law changes and details.
Click to access State-Tax-Changes-as-of-January-1-20201.pdf
Pending developments this year are focused on the Tax Cuts and Jobs Act (TCJA).
This week expectations – Final FTC Regs, final and proposed BEAT Regs
This year (maybe) – Final and proposed Sec. 163(j) Regs (currently at 550 pages)
This year/January 2020 – Sec 267A final and proposed Regs, Sec 863(b) sourcing proposed Regs
by June 30, 2020 – Final FDII regulations, GILTI high-tax exclusion, Sec 250 participation exemption
EY’s Global Tax Alert provides further details, including OECD developments reported on previously
Click to access 2019G_005186-19Gbl_Report%20on%20recent%20US%20intl%20tax%20developments%20-%2015%20Nov%202019.pdf
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.
Click to access 2019G_001146-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2013%20Sept%202019.pdf
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.
Click to access 2019-12436.pdf
Click to access 2019-12442.pdf
Click to access 2019-12437.pdf
Click to access 2019-12441.pdf
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.
Click to access 2019G_002538-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2023%20May%202019.pdf
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.
Click to access 2019G_002432-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20May%202019.pdf
The Tax Executives Institute (TEI) provided insgihtful comments to the recently issued GILTI Proposed Regulations, addressing the following main points:
- Proposed regulation section 1.951A-3(h)(1) (the “temporarily held property rule”) provides that temporarily held property acquired with “a principal purpose” of reducing a U.S. shareholder’s GILTI inclusion will be disregarded
- Basis adjustment rule for tested losses
- Only used tested losses should increase Subpart F E&P
- Basis reductions should only apply to actual transfers of stock
- Deemed Sec. 367(d) expense should reduce tested income
- Prop. Reg. § 1.951A-2(c)(5) anti-abuse rule (and authority to issue such rule)
TEI’s comments are well reasoned and should be reviewed to further understand the complexities, and need for added clarification going forward.
Click to access TEI%20Comments%20-%20Proposed%20GILTI%20Regulations%20Section%20951A%20-%20FINAL%2026%20November%202018.pdf
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
- 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
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.
Click to access 2018G_011433-18Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2019%20Oct%202018.pdf
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
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
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