The House’s revised lame-duck tax bill would provide relief to some multinationals and private equity firms facing additional taxes on offshore earnings because of the 2017 tax law.
An apparent glitch in the law could subject certain U.S. taxpayers to tax on the offshore earnings of foreign entities even though those taxpayers don’t control the entities generating the earnings. The conference report on the law appears to suggest this result wasn’t lawmakers’ intent.
A tax package (amendment to H.R. 88) released by House Ways and Means Committee Chairman Kevin Brady (R-Texas) Dec. 10—a revision of a late-November bill—would save some taxpayers from that fate by reinstating a measure that existed before passage of the 2017 law and creating more narrowly focused rules that would impact only U.S. taxpayers under foreign control.
A “foreign controlled” U.S. shareholder is defined under the fix as a U.S. person who owns—or is treated as owning—more than 50 percent of a foreign corporation.
The change in the tax law that caused the glitch was meant to shut down certain types of transactions used after company inversions to skirt U.S. tax obligations on foreign income, according to the conference report. Brady’s proposed narrower approach would target those transactions in a way that “is less susceptible to unintended consequences,” said Layla J. Asali, member and vice chair of the tax department at Miller & Chevalier Chartered.
Brady’s November tax package included some fixes to the 2017 law, but not this one. The Dec. 10 version was sweetened to improve its chances of passing the House. It is unlikely to pass in the Senate, where it would need the backing of nine Democrats.
If the Brady proposal “pans out, it would be welcome news for certain taxpayers,” said David Sites, a partner for international tax services at Grant Thornton LLP in Washington.
“This has been a tough issue and it’s good to see some movement,” he said.
The American Investment Council, which represents private equity firms, and multinational Coca-Cola Co. have separately asked the Treasury Department to correct the mistake in regulations. Coca-Cola said it was evaluating Brady’s legislation and had no comment.
“Treasury has sufficient regulatory authority to resolve this issue,” Jason Mulvihill, general counsel for the AIC, said in a Dec. 11 statement. “We also appreciate that policymakers in the House are once again highlighting the importance of solving this issue as soon as possible.”
Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) previously said a regulatory fix would be appropriate. But practitioners have said the apparent glitch may require action from Congress. Hatch is reviewing Brady’s revised tax package, which includes several of the senator’s priorities, a spokeswoman said in a Dec. 12 email.
At a conference in November, Daniel McCall, deputy associate chief counsel (International-Technical) at the Internal Revenue Service, acknowledged concerns that companies had raised, and said the agency was working on proposed regulations that may provide companies with retroactive relief from the 2017 law’s provision.
The headache for practitioners and taxpayers stems from the law’s repeal of tax code Section 958(b)(4). As a result, a foreign subsidiary that is owned by a foreign parent corporation that also owns a U.S. subsidiary will be treated as being owned by the U.S. company. This makes the foreign subsidiary a controlled foreign corporation (CFC).
U.S. shareholders of CFCs—foreign corporations more than 50 percent owned by U.S. persons—face additional reporting requirements and U.S. taxes on the income the CFC earns.
The way the law is written, this “downward attribution” treatment applies even if the foreign and domestic subsidiaries are unrelated based on the definition of related persons in Section 954(d)(3).
The Brady tax bill would reinstate Section 958(b)(4) and create a more tailored approach for targeting the post-inversion “de-control” transactions the original tax law provision was intended to address, Asali said.
Under the de-control strategy, used to sidestep U.S. taxes, an inverted U.S. company and its new foreign parent enter into transactions to eliminate the inverted company’s control of a CFC. This can allow the new foreign parent to access earnings and profits of the CFC without causing the inverted U.S. company to incur U.S. federal income tax.
Brady’s proposal is “a sensible approach that is consistent with congressional intent and legislative history,” Asali said.
—With assistance from Alison Bennett
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(Updates with comment from Hatch's office in 11th paragraph.)