IRS recently updated its previously published Q and A’s re: application of Sec. 965 deemed repatriation tax instructions re: estimated tax payments for 2018. The prior version still has a debatable Question 14 that applied a 2017 overpayment to the entire amount of deemed repatriation tax (not just the first installment) prior to application for the first estimated payment of federal income tax generally due April 15th.
As Question 14 was issued literally just prior to the first installment date, corporations may have missed this point and thereby would be subject to interest and penalty for late payment.
The latest update obviates such penalties if the second estimated payment is a cumulative catch-up amount for both the first and second estimates.
However, what was not fixed is the apparent ability by IRS to apply the overpayment solely to deemed repatriation tax in its entirety prior to applying it to estimated federal income tax liability due. This is still a question in the minds of many.
EY’s Global Tax Alert highlights this development.
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 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.
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
The US administration has released final regulations on its CbC reporting requirements. This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018. The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016. However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.
Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.
This guidance will have widespread impact and contains many clarifications that should be understood prior to collecting data.
The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals. A link to the proposed Reg’s is provided:
The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:
- Final Regulations would not take effect until tax years beginning after publication in the Federal Register, which would be 2017 for calendar-year taxpayers.
- The CbC report would be submitted to IRS with the US corporate income tax return, due Sept. 15.
Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations. If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.
Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD. This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.
KPMG provides a timely and relevant update of tax dispute resolution issues, coupled with Best Practice ideas. The publication can be accessed from this link:
A summary is provided for quick reference:
- US: New IDR process: Required (new) IDR process for all large-case exams: IDR Collaboration (carrot) & delinquency notice/summons procedures (stick)
- Risk from whistleblowers: Current climate and Best Practices, including avoidance of retaliation, ethics hotline, procedural awareness, tax dept. procedures, and what to do if you suspect whistle blowing
- IRS practices, various items of interest
- Global tax disputes, including a focus on UK GAAR (also refer to a prior blog post)
This publication provides insight into today’s tax challenges and risks, to be mitigated by Best Practice ideas that should be an integral part of all multinationals tax framework.
It will be interesting to note developments into the new procedure by IRS as demonstrated by the agents performing the exam, as the summons procedure process is mandatory and has no exceptions. Additional time should be spent understanding the issue raised by IRS, as well as collaborating on the draft inquiry, to benefit from undue data collection and audit inefficiencies.
Additionally, the whistleblower comments should be used to test, modifying as necessary, current internal governance procedures. Such procedures should be reviewed, tested, and modified on an annual / recurring basis.