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.
The first set of final Regulations were recently issued; some changes include:
- Stock basis flexibility
- Right to have some changes in methods of accounting as “regarded”
- Clarification of ordering rules
- Elect to not disregard payments between SFC’s between measurement dates
- Including only actual Sec 956 inclusions for the “without” calculation
As the Regulations were issued in January, this set of Reg’s, as well as others to be issued by June 22, 2019, will be treated as having retroactive effect to the enactment date of December 22, 2017.
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 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.
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 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.