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.
IRS issued new regulations for translation in Sec. 986(c)
The IRS also issued new LB&I guidance addressing computation of Sec. 986(c) computations, attached for reference.
US T.D. 9909, Final Regulations, in coordination with the issuance of proposed regulations, REG-124737-19, addressing Sec. 245A and the exception to subpart F income under Sec. 954(c)(6). The final regulations address extraordinary dispositions and reductions.
The UK will drop its Digital Service Tax (DST) initiative, knowing it would only increase its stimulus by several hundred million dollars , while COVID-19 has set the country back hundreds of billions of dollars in stimulus. It will be interesting how other countries, who have adopted or are thinking about a unilateral DST, will react prior to the OECD Project addressing this in Pillar One.
IRS Notice 2018-99, published on Christmas Eve, has created quite a controversy in its short history for creating non value-added work in extricating costs of a company’s (leased or owned) parking facilities for which a federal tax deduction would not be allowable. The Notice and TEI’s letter are attached for reference.
TEI’s timely letter expresses the history of this provision, and most importantly the inordinate amount of work, legal fees, etc. that would be involved pursuant to the Notice.
Two safe harbor provisions are suggested for implementation; Owned facilities $100 per parking spot per directly attributable expenses, and leased facilities would use 5% of the rent as the deemed amount subject to disallowance.
It is hopeful that IRS will quickly respond to current controversy and adopt such harbor provisions, or similar provisions, to avoid significant costs involved in preparing the 2018 federal income tax returns.
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.
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.
Significant tax developments have recently transpired for US / international tax.
Section 965 Proposed Regulations have been issued, including discussion of potential stock basis elections that are critical to review (reference link).
Proposed Regulations issued for capital expensing provisions of US Tax Act (reference link)
IRS has published its statutory interpretation of their previously issued FAQ Q&A that 2017 overpayments of federal income tax are allocated solely to transitional tax liability in its entirety prior to allocating such amount to its 2018 federal income tax liability without transition tax. In summary, the reasoning is that the transition tax is a 2017 liability, notwithstanding the ability to make an election to pay in installments. Considerable debate is currently ongoing re: this latest development, as it seemingly obviates the election methodology solely for one instance of overpayments, yet preserving the ability of deferred payments if a prior year overpayment is not present.
The Ninth Circuit Court of Appeals has reversed the Tax Court’s holding in Altera v. Commissioner, and upheld a 2003 regulation that requires participants in a cost sharing arrangement (CSA) to treat stock-based compensation costs (SBC costs) as compensable. The Appellate Court concluded that the regulations were valid under general administrative law principles and that under current law, SBC costs should be treated as shared by participants in a CSA. It is important to note that the Tax Court’s taxpayer-favorable opinion is still precedent and authority for taxpayers located in geographical areas outside of the Ninth Circuit’s jurisdiction.
The IRS Foreign Account Tax Compliance Act (FATCA) certification portal is now live. The FATCA Registration System has been updated to allow for the completion and submission of the certification of pre-existing accounts and periodic certifications. The IRS is recommending that all FATCA registered entities should monitor their message board for notifications. The registration system allows for the establishment of an online account for financial institutions to register with the IRS, renew their agreement, and complete and submit FATCA certifications.
EY’s Global Tax Alert discusses some of the latest developments.
Technical and lengthy documentation re: the above highlights will need critical reading and review in the very near future for US / international tax professionals.
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.