The US Tax Act GILTI regulations are under review, and should be released before the end of Q3, that will require review and incorporation into the annual ETR. The regulations are expected to address a consolidated, vs. separate shareholder, approach for the calculation as well as some guidance re: US expense allocation. EY’s Global Tax Alert summarizes the status of this guidance.
Additionally, guidance was recently released on Sec. 162(m) compensation, also necessitating review for Q3 reporting.
The proposed regulations that were released for Sec. 965, deemed repatriation tax, are expected to be followed up by final regulations by June 2019. The third quarter 2018 marks the end of the SAB 118 period to finalize such amounts, notwithstanding additional guidance in the future. Note, these regulations should provide definitive guidance on some pending items (inclusion of PTI for a E&P deficit foreign corporation; calculation of Sec. 986 gain for Sec. 965b E&P) that may require amending 2017 corporate income tax returns.
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.
EY’s Global Tax Alert provides the latest US updates, noting the following:
- Regarding the TCJA’s foreign derived intangible income (FDII) provision, a Treasury official was quoted as saying the Government is actively looking at how to apply the disqualification for related-party services that are substantially similar to services provided by the related party to US taxpayers.
- A senior IRS official said the legislative history and the purpose of the provision strongly suggests that the Internal Revenue Code Section 78 GILTI gross-up should be placed in the GILTI basket. The official conceded that that interpretation is not in the statute, however.
Reflecting on the base erosion anti-abuse tax (BEAT), the official said Treasury is presently undecided if including a markup disqualifies the entire charge or just the amount of the markup for related-party services, that otherwise qualifies for the services cost method exception.
The noted highlights are very critical in estimating the impact on financial statements, as well as compliance and planning opportunities. To the extent timely guidance is not provided this year, there will be additional uncertainties in how to measure the effects of the complex Tax Act provisions.
As multinationals commence to calculate the US Tax Act’s provisions for Global Intangible Low-Taxed Income (GILTI), the literal language of the law and the Conference Report present a myriad of confusion. The name of this provision is also a misnomer, as the income to be measured is not limited to that sourced from intangibles.
The intent of the provision, as explained in the Conference Report, is to provide a 10.5% (for 2018) tax on low-taxed earnings of foreign affiliates, as reduced by 10% of its tangible personal property measured by US tax principles. This would be accomplished with an 80% foreign tax credit, thus legal entities in countries with a tax rate not exceeding 13.125% would not be subject to this additional minimum tax on foreign earnings.
Due to the speed of enactment, the technical details of the enacted law does not mirror this intent. As a result, different US-based multinationals may be taking different approaches for measurement, ranging from the Conference Report intent to the enacted law which may not allow for any foreign tax credits based on the separate foreign basket approach coupled with uncertainty for the allocation of US expenses to such income.
This confused state will also present difficulties in measuring different aspects of this provision for different companies, depending on their interpretation and calculation.
Hopefully, this confusion will be clarified to align the law with the intent of the Conference Report. Without such guidance, this provision will present undue costs, complexity and subjective interpretation going forward.
The Tax Executives Institute, Inc. (TEI) previously issued excellent comments regarding divergent views of the Big 4 accounting firms for US GAAP tax accounting issues for the new US Tax Act aspects.
These views are still divergent today as we approach the end of March, and further issues continue to develop that impact the cash tax and tax reporting aspects for the US Tax Act. Accordingly, the same facts may provide a different repatriation tax liability and tax accounting for different multinational companies, certainly a difficult variable for comparison by tax experts and, most importantly, by investors.
As these positions may continue to diverge, position papers and discussions with the audit firm, Audit Committee of the Board of Directors and the company should be scheduled to ensure there are no surprises as earning release dates are emerging.
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 global intangible low-taxed income (GILTI) provision in the US Tax Cuts and Jobs Act (Tax Act) was legislated based on the principal of each relevant US, or relevant, shareholder. This contrasts with the US consolidated group approach for the Sec. 965 repatriation tax, thus will/should both be consistent?
Currently, a planning review of the US/relevant shareholders may be dictated based on the types of controlled foreign corporation (CFCs) in that particular shareholder chain. However, there has been acknowledgment of this mismatch for ownership tests, and a possibility that the GILTI provisions may also conform to a US consolidated group approach.
Pending further guidance, it may be prudent to calculate the GILTI effect on both approaches and take advantage of the 1-year SEC measurement period for public companies for more definitive rules. However, US public MNE’s should review the potential guidance to be issued for Q1, with clarity as to whether a reasonable amount will be calculated as part of the Annual ETR process, or omitted therefrom.
Based on the complexity of this provision, additional challenges are present if the current shareholder chain approach is not changed. Notwithstanding this aspect, there are many complexities involved with this calculation to derive a reasonable amount or a number which is ultimately final and certain.