The Year Ahead in International Tax

With a surreal and challenging year coming to a close, and a new administration taking the reins in January, it is an interesting vantage point from which to write about the year ahead in international tax. In this article, I will focus more on the legislative and regulatory side of things, but much has been (and will continue to be) speculated regarding what will be the new Treasury’s posture at the OECD, as the BEPS Pillars 1 and 2 negotiations strive to reach consensus by the middle of next year. It is only natural to wonder whether the U.S. change in administration may affect this timing.

We will likely see a few more of the TCJA (Tax Cuts and Jobs Act) regulations finalized before Jan. 20, but most of the international TCJA regs have already been finalized. Still out there are proposed tax code Section 163(j) regulations with a significant international component, and proposed GILTI domestic partnership regulations. It is also possible that certain long-anticipated proposed regulations such as the much-needed proposed PTEP (previously taxed earnings and profits) regulations will make the cut. The current Treasury knows that regulations not published in the Federal Register by Jan. 20 will almost certainly be pulled and will have to be reviewed, approved, and cleared again by the new administration. That generally will include review by an OMB Office of Information and Regulatory Affairs under new leadership.

Section 864(f), which provides for elective worldwide affiliated group interest expense allocation and apportionment, was last visited as part of the TCJA discussions and is set to take effect on Jan. 1. On that basis, Treasury and the IRS added a regulatory project for implementing these new rules in the 2020-21 priority guidance plan. Such guidance will surely be needed quickly once the statutory provision goes into effect.

The Biden Treasury’s role in international tax policy may be affected by the outcome of the Georgia Senate races on Jan. 5. If control of the Senate is achieved by the Democrats, the prospects of new international tax legislation increase. Then, we may see proposed changes to the TCJA provisions, such as an imposition of a per country global intangible low-taxed income (GILTI) and perhaps a reduction or elimination of qualified business asset investment (QBAI) for GILTI and foreign-derived intangible income (FDII) purposes, as well as the consideration of new statutory provisions that would further encourage the conduct of business activity—particularly manufacturing—in the U.S. If Republicans maintain control of the Senate, Treasury regulations may be the most viable path for the Biden Administration to implement tax policy changes.

In this regard, the new Treasury may reinstate a tradition of providing legislative proposals (often referred to as Green Book proposals) along with its annual proposed budget—including suggested legislative changes to international tax provisions. Will the Biden Administration issue an executive order, like prior administrations have done, asking Treasury to identify recently issued regulations for further review? For example, Executive Order (EO) 13789 issued by the Trump Administration in 2017 led to re-examinations of the Section 385 and Section 987 regulations, among a few selected others that were issued in 2016.

Sure to be re-examined either formally or informally by the new administration are the GILTI high-tax election regulations, which were finalized in July 2020 with an accompanying set of proposed regulations that would largely conform the GILTI and Subpart F high-tax elections and propose a single unified election for both. Senate Finance Committee Ranking Member Ron Wyden charged those regulations were an overstep of Treasury’s authority, and the Senator (along with Senator Brown) even proposed legislation that would amend Section 954(b)(4) to ensure that such provision is limited only to highly-taxed items of income that would otherwise constitute subpart F income (specifically, foreign base company income or insurance income). Still, it is not clear that the new administration would consider pulling those regulations, which interpret Section 954(b)(4) more broadly to apply to any item of income.

There are reasons to keep the GILTI high-tax exception around that might appeal to the Biden Treasury: (1) they are generally popular with business, (2) without them there is incentive for taxpayers to intentionally trip certain items of income into subpart F income characterization to benefit from Section 954(b)(4), and (3) if the GILTI rules become too strict, they might encourage inversions. Every administration since George W. Bush signed Section 7874 into law has taken a strong stance against inversions, and it is expected the new administration will follow suit. Alternatively, the Biden Administration may prefer to address any concerns with the GILTI high-tax exception, and the GILTI rules more generally, legislatively, if that is a realistic option.

Once the Biden Administration’s top tax policy leadership positions are filled, we may start to see international tax regulations flowing again. What regulations might we see at that point? We may see Section 987 and Section 385 proposed regulations, if the new administration agrees with the current administration that proposed regulations in these areas are needed to reduce unnecessary taxpayer burden, a concern identified in response to EO 13789. We also could see finalization of the 2020 proposed foreign tax credit regulations that, among several proposed rules, would add a jurisdictional requirement to foreign tax creditability, thereby targeting digital service taxes and other extraterritorial taxes. Perhaps we will see finalization of the proposed cloud and QFPF (qualified foreign pension fund) regulations, both issued in 2019. We may also finally get needed general Section 245A guidance, Section 952 guidance, and Section 367(d) guidance for intellectual property brought back to the U.S., all regulatory projects that have been previously announced. Time will tell, as new competing priorities begin to emerge, but it looks clear that the new Treasury will have much to consider on the international tax regulatory front as soon as the Office of Tax Policy gets rolling again next year.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Doug Poms is a principal in the International Tax group of the Washington National Tax practice of KPMG LLP. He recently left the U.S. Treasury Department after serving as International Tax Counsel.

The information in this article is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author(s) only, and does not necessarily represent the views or professional advice of KPMG LLP.