Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Tax Cuts and Jobs Act’

US developments: Will FDII survive?

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.  

http://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_9_March_2018/$FILE/2018G_01364-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%209%20March%202018.pdf

US Tax Act: SIT implications

McDermott Will & Emery highlights the state tax effects of the deemed repatriation and GILTI tax; some of which may not may be intuitive.  The deemed repatriation income is included under Sec. 951(a), whereas the GILTI inclusion is includable under new Sec. 951A.

The concept of special deductions also is highlighted for further analysis.

Note, as different technical details of this bill are further reviewed, the SIT aspect becomes even more complex with timing issues by states not uniform from the federal changes.

The deemed repatriation inclusion will be includable in 2017 US federal income tax returns for calendar-year taxpayers, whereas most provisions will take effect in 2018 or later.

https://www.mwe.com/en/thought-leadership/publications/2017/12/state-tax-implications-repatriation-transition

Senate tax bill

Amid the last-minute penciled-in amendments and heated discussions, the Senate Bill was narrowly passed by a vote of 51-49, with the text referenced herein.

The bill now moves to a reconciliation phase between the House and Senate, with such bill potentially forwarded to the President for signature before Christmas.

Several amendments were passed, including a phase-out of the corporate property expensing provision after 2022, reinstatement of corporate AMT and an increase of the deemed repatriation tax for accumulated foreign earnings (thereby achieving greater tax revenues for passage).

The 479-page bill is still incredibly complex, in effect layering upon the present US tax rules in many areas, and the final reconciliation stage will produce additional changes.  However, it is expected that the Senate’s provisions will largely remain in place as the votes are more critical for passage and major shifts in an already contentious bill may point to possible defeat of the bill, which President Trump is not willing to accept.

Next stage after passage: A review, starting now, of earnings and profits, etc. that will drive the relevant tax accounting adjustments required for year-end closing of the books for calendar-year taxpayers due to “enactment” of the bill prior to Dec. 31st.

https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rXqXuQfYbRas/v0

US Tax Bill

The House Ways and Means Committee published the initial draft of their bill on Nov. 2, 2017, a far-reaching document that had a few surprises.

Apart from the expected provisions, albeit different tax rates for the transition tax to a (quasi) territorial system than was expected, the double dip corporate interest provisions (worst of either rule) added a base erosion principle for most large multinationals in addition to a 30% tax based limitation.  This new limitation was based on the premise that debt was being used in the US, receiving a tax benefit therefrom, while such proceeds have been transferred offshore resulting in a non-symmetrical base erosion assumption.

Additionally, a new 20% excise tax on payments to foreign affiliates from the US that are deductible, includable in cost of goods sold/inventory or as fixed assets are subject to a non-deductible 20% excise tax.  This provision raises $155 billion.  Most importantly, this does not have an export offset that was present in the now extinct Business Activities Tax provision, and is not limited to US headquartered multinationals.  Knowing this provision would be challenging for most organizations to react quickly thereto, the effective date is 2019 whereas most of the provisions have an effective date of 2018.

Both of these “surprise” provisions already have many decrying the present draft, while the House Ways and Means Subcommittee is already in process of revising this document.

Aside from the formal bill, the House comments of each section should be reviewed, as it underscores the intent of the writers for such provision.

For the political process, this bill will be changed by the House Ways and Means prior to a vote by the House, another version will be produced by the Senate and a final reconciliation bill will need to be passed by both the House and Senate prior to forwarding to President Trump for signature.

The effective enactment date is being pushed for the end of this year, although it may easily drift into the first quarter of 2018.

A link to the bill is provided, which should serve as a baseline followed by legislative changes as it flows through the process, potentially becoming the largest tax code change since the 1986 provisions.

https://waysandmeans.house.gov/tax-cuts-jobs-act-resources/

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