The 2017 tax overhaul reformed international tax rules in the U.S., including requiring companies to bring home offshore profits.
Nearly a year and a half later, companies are still waiting for final guidance from the Treasury Department on many of those international rules. If the government finalizes rules by June 22, 2019—18 months after the passage of the tax bill—they will be retroactively effective to the date of the law’s passage. But if not, there could be a period of time in which the regulations wouldn’t be effective.
“Treasury doesn’t want that gap,” Gregory Jenner, a partner at Stoel Rives LLP in Washington, said in an email.
“This is really a provision to benefit the government—to make anti-abuse rules retroactive,” said Lisa Zarlenga, a partner at Steptoe & Johnson LLP in Washington. “Generally the government is providing reliance on the proposed regulations”—as long as taxpayers apply the rules in their entirety—“so if the rules are favorable, taxpayers can opt in,” she added, in an email.
Here’s where the international rules stand now:
Anti-Base Erosion Tax
Companies are still waiting on final rules for the new base erosion and anti-abuse tax (BEAT): a 10 percent minimum tax meant to prevent large U.S. multinationals from shifting profits overseas through excessive deductible payments to foreign affiliates. A company becomes subject to the BEAT when 3 percent or more of its deductible payments are considered base-eroding payments.
One of the biggest issues under the BEAT is the treatment of non-cash considerations, like liquidation of stock under Section 332, reorganization transactions under Section 368, and incorporation transactions under Section 351.
Commenters including the New York State Bar Association, the U.S. Chamber of Commerce, and the Tax Executives Institute said intercompany payments should only be captured under the BEAT if those payments result from an actual payment or accrual.
“One policy argument that has been raised is that the TCJA was intended to incentivize bringing back assets into the United States, and this rule would discourage such transactions,” Daniel V. Stern, a partner at Baker McKenzie LLP, said in a March 20 email.
The issue is high on Treasury’s agenda as it tackles comments on the Dec. 13 proposed BEAT regulations (REG-104259-18), Daniel M. McCall, IRS’s deputy associate chief counsel, said March 19 at a Practising Law Institute event.
Global Intangible Low-Taxed Income
Companies have questions about how the new international tax rules are meant to ensure companies pay a minimum amount of tax on overseas profits earned in countries with low tax rates—including how to allocate expenses under these new rules.
In the 2017 tax law, Congress introduced a new income category, called global intangible low-taxed income (GILTI), under Section 951A for income U.S. shareholders earn from controlled foreign corporations. The IRS issued proposed rules for GILTI in September (REG-104390-18).
The GILTI tax is supposed to kick in if a company is paying a tax rate below 13.125 percent in foreign countries. But the rules were drafted in a way that puts some multinationals in high-tax countries in a worse situation because of how the rules interact with foreign tax credits.
Companies can only claim foreign tax credits that amount to 80 percent of their GILTI income, meaning more taxable income makes more foreign tax credits available. But allocating expenses, including research and development, interest, and stewardship, can chip away at that taxable income even if the spending is done in the U.S.
Previously Taxed Income
Companies are still waiting for final rules on how to source distributions for their previously taxed income (PTI), or previously taxed earnings and profits—a calculation that could ultimately hit the amount of foreign tax credits available for any given year.
Previously taxed income was created through the repatriation tax, a one-time tax on offshore cash, and the Subpart F and GILTI regimes for offshore earnings. Guidance is important for companies that have a combination of the types of income since each come with a different foreign tax credit limitation.
The Internal Revenue Service previewed forthcoming guidance in a Dec. 14 notice (Notice 2019-01), but the rules mainly explained the ordering of income that was previously taxed through the repatriation tax.
“The guidance put out so far is useful, but it is administratively complex and some companies are hoping that Treasury streamlines what they have already put out,” said Jose Murillo, director of the International Tax Services practice at Ernst & Young LLP in Washington.
Treasury hopes to release a package of rules on previously taxed income by fall 2019, Brenda Zent, special adviser to the international tax counsel in Treasury’s Office of Tax Policy, said March 19 at a Practising Law Institute event.
Foreign Tax Credits
“There are a significant number of open issues still under the foreign tax credit rules,” said Adam S. Halpern, a partner at Fenwick & West LLP.
Companies aren’t only confused about the foreign tax credit rules and their interaction with GILTI, but there is also a “significant and uncertain issue” with the way foreign tax credits interplay with the treatment of a controlled foreign corporation’s PTI, Halpern said in an email.
The proposed regulations for foreign tax credits (REG-105600-18), issued Nov. 28, 2018, provide guidance on the 2017 tax law’s repeal of rules for calculating deemed-paid foreign tax credits and included proposed rules on previously taxed earnings and profits (PTEP).
But the proposed regulations and the PTEP notice “left a lot of unanswered questions,” Halpern said. For example, taxpayers aren’t sure what to do with those previously taxed profits after considering the foreign tax credit rules and the new GILTI provision, especially because the statutory rules on PTEP didn’t significantly change post-tax reform.
Under the prior tax law, PTEP rules would apply only “when a U.S. company’s foreign subsidiary earned immediately taxable ‘Subpart F income’ which was relatively rare,” Halpern said. “Now, with the new GILTI regime, most income earned through foreign subsidiaries of a U.S. company will be immediately taxed in the U.S., subject to the foreign tax credit, and the earnings thereafter will be PTEP.”
Foreign-Derived Intangible Income Deduction
The foreign-derived intangible income provision is intended to counterbalance GILTI with an incentive for companies to locate manufacturing operations or intellectual property in the U.S. and export goods and services abroad—ultimately neutralizing a company’s decision on where to locate.
FDII is one of the last international sections to be addressed in regulations. The IRS issued proposed rules March 4 on the Section 250 deduction (REG-104464-18), which gives companies an effective tax rate of 13 percent, rather than 21 percent, on income from certain exports. That benefit winds down over time, with a cut to the deduction in 2026 that results in a 16 percent effective tax rate. The proposed rules include guidance on how companies can document their foreign sales.
The IRS recently canceled a hearing on rules meant to curb company abuse of cross-border tax deductions, but that doesn’t mean companies don’t have concerns.
Dec. 20 proposed rules (REG-104352-18) on “hybrid mismatch” arrangements—an abusive cross-border method of doubling up on tax deductions—took an approach some companies didn’t expect by going a few steps beyond international guidelines on hybrids set by the Organization for Economic Cooperation and Development.
“The rules caught some taxpayers by surprise because they go beyond what the OECD was targeting,” Murillo said.
Companies have had final rules (REG-104226-18) on the one-time repatriation tax, or transition tax, under Section 965 for about two months. But tax calculations aren’t fully completed and companies may need to file amendments to their tax returns as questions remain, especially at the state level.
The federal tax applies to U.S. companies’ accumulated earnings and profits kept offshore since 1986. Companies are hit with a 15.5 percent tax on cash and cash assets, and an 8 percent tax on illiquid assets. They could choose to pay the tax on their “deemed repatriated” overseas earnings all at once or in eight annual installments.
But the tax calculations might not stop there. A U.S. multinational could also owe state taxes on any offshore money repatriated to a state they operate in. Companies aren’t sure how to calculate their state repatriation taxes, however, because not all states have released guidance on how companies should apportion the income.
“You’re in an environment where it’s pretty clear that inadequate guidance is given and yet we’re past the filing dates,” said Karl Frieden, vice president and general counsel of the Council On State Taxation.
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