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Former Proposed Regulations for Sec. 163(j), never finalized, are withdrawn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
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 review of these regulations by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) review is progressing, with over 500 pages of proposed regulations to be released publicly this week.
Lafayette G. “Chip” Harter III, Treasury deputy assistance secretary for international tax affairs, provided comments on Nov. 9 at the Federal Tax Conference sponsored by the University of Chicago Law School.
The business interest expense limitation, currently applied by many at the individual CFC level, would be determined on a look-through method, with net external interest calculated at the CFC group level and allocated to CFC’s, with a tiering-up approach.
The proposed Reg’s will be very complex and long, with over 500 additional pages of BEAT, FTC, etc. also to be issued later this month.
IRS recently published proposed regulations under Section 956 (deemed dividend provision), with both good and bad news in further alignment with the US Tax Act enacted at the end of 2017. At that time, it was hoped that Section 956 would be abolished, but a late-breaking change in the final law was put in place for Section 956 to remain. This update achieves parity with the participation exemption system provided for dividend distributions.
Good news: Corporate US shareholders are excluded from the application of Section 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and effective repatriations. Thus, the amount otherwise determined under Section 956 is reduced to the extent that the US shareholder had received a distribution qualifying for a Section 245A deduction from the CFC in an amount equal to the Section 956 amount. (i.e. the distribution still needs to be a dividend)
Bad news: Section 956 is still in the Code, along with potential direct/indirect tax consequences from guarantees, loans, etc. To the extent such amount is not a “dividend” for US tax purposes, there are traps still present to warily avoid.
There are planning opportunities (i.e. tax consequences from a loan vs. an actual dividend, etc.), however there are also traps to avoid, so it is safe to assume that diligence is still required for this Code section.
A reference to the proposed Regulations are provided for reference.
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.
The Tax Executives Institute (TEI) has provided numerous comments re: Sec 965 positions as written in the law, supplemented by additional guidance.
Summary of comments:
Cash position definition
Foreign Tax Credit, double-counting of Earnings & Profits
Dividends paid from a CFC to another CFC or a third party
Hovering deficit taxes
Stock basis election should be extended to 180 days, vs. 90 days per IRS guidance
Changes in methods of accounting
CFC attribute mismatches
Foreign tax credit adjustment
“Applicable percentage” guidance
Average FX rate, vs. year-end spot rate, used for measurement
2017 overpayments applied automatically to transition tax (Still an issue!)
The letter provides background and examples related to the comment areas, and should be reviewed to gain a further understanding of the complex dynamics that will hopefully be mitigated via the suggestions.
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.