Tax practitioners have a lot of questions about the 2017 overhaul’s international provisions—and most of those are going unanswered.
The American Bar Association’s tax section began its midyear meeting in New Orleans on Jan. 17. But the ongoing government shutdown has meant Treasury and IRS officials are largely unable to travel to conferences.
Furloughed IRS employees were required to cancel authorized travel scheduled after Dec. 21, 2018, and all other travel for non-furloughed employees must be approved, according to an agency document. The shutdown began Dec. 22, 2018.
The conference is usually a chance for practitioners to hear from top Internal Revenue Service and Treasury Department officials and to iron out confusion about tax provisions. Such clarity is especially important now, as the tax filing season begins Jan. 28 and the tax overhaul’s changes have rankled practitioners and companies for the last year.
“I would assume that even if they didn’t have answers they would definitely have a conversation, which would have given us some context and broad directions for future conversations, if not the solution,” Himanshu S. Sinha, a partner at Trilegal in New Delhi, India, said at the conference.
The government shutdown has left hundreds of thousands of government workers furloughed and without pay. The IRS recently called back 46,000 of its more than 80,000 employees.
The ABA tax section didn’t immediately return a request for comment.
What About the BEAT?
The 2017 tax law created a base erosion and anti-abuse tax (BEAT), which is a 10 percent minimum tax to stop companies from moving profits offshore through excessive deductible payments. The BEAT, under new tax code Section 59A, increases to 12.5 percent after 2025.
Companies seeking advance intercompany pricing agreements with the IRS are wondering if the section of the agency that makes advance pricing agreements (APAs) would be open to addressing issues under the BEAT.
Typically, the Advance Pricing and Mutual Agreement Program is designed to focus on mitigating transfer pricing disputes. Companies secure APAs to get certainty on tax positions and avoid a future audit.
The IRS should “go ahead and knock off the BEAT issue at the same time” as it considers APAs, Thomas A. Vidano, Washington-based executive director of EY’s transfer pricing controversy services, said on a panel.
And although the BEAT isn’t directly a transfer pricing issue, Rev. Proc. 2015-41 states that the APA program can be used to also look at “issues for which transfer pricing principles may be relevant,” Vidano said.
The BEAT does deal with intercompany payments like cost of goods sold and payments for service costs, and those intercompany payments could be a part of division’s purview, Vidano said.
Whether Congress intended for the BEAT to supersede treaties is another question that is percolating.
It’s causing the “most friction” for practitioners, said Maruti R. Narayan, a New York-based partner at DLA Piper.
For instance, model treaties have nondiscriminatory clauses. The BEAT is an “injury to the guy making deductible payments outside the U.S.,” Narayan said. If that same payment were domestic, the BEAT “wouldn’t be on the table” and there wouldn’t be a conversation, she said.
But if the BEAT rules can be read harmoniously with a certain treaty, then it may not be an issue, Narayan said.
Still if a conflict persists, companies need the final word from the government on whether the BEAT provisions would override treaty language, she added.
Unanswered questions on tax reform regulations, such as the global intangible low-taxed income (GILTI) rules, are leading companies to feel unsure about any tax risks they’re assuming, said Morgan Klinzing, a Philadelphia-based associate at Pepper Hamilton LLP.
Companies are awaiting final regulations on GILTI. The tax code section 951A provision ensures that companies pay at least some tax on their foreign income by imposing a 10.5 percent rate on profits above a deemed rate of return that aren’t already taxed at a certain threshold.
“It’s always helpful to have those in-person discussions to clarify any technicalities that might not be picked up in the regs or other questions that might not be directly addressed,” Klinzing said.
It recently became pretty clear that the shutdown would keep IRS people from coming to ABA, said Richard F. Riley, a partner with Foley & Lardner LLP in Washington, calling it “regrettable but not a surprise.”
The IRS officials who attend ABA sessions on tax-exempt organizations are typically very good about giving practitioners an indication of where things are going, he said. And now, practitioners have a lot of open questions about how to handle audits and IRS information requests during the shutdown, Riley told Bloomberg Tax.
“There are no clear answers,” he said.
—With assistance from Siri Bulusu and Patrick Ambrosio in New Orleans