Congressional activity has slowed in the month of August with both the House and Senate taking a recess, although the Senate recess was shortened to one week, and they are now back in session. Key legislative issues, including the FY 2019 appropriations bills, must be dealt with in September, but the upcoming mid-term elections will be the primary focus in Washington this fall with the possibility that Republicans could lose the majority in one or both chambers.
With the possibility that Democrats may gain control of the House, there has been speculation about what action might then be taken to reverse some of the changes in the Tax Cuts and Jobs Act (TCJA). Priority topics are likely to include increasing the corporate tax rate and changing the treatment of capital gains and carried interest. There is more uncertainty about what action might be taken on the new cap on state and local tax deductions and the section 199A pass-through deduction.
Treasury and the IRS continue to release important guidance on key provisions of the TCJA with keen interest from the tax community on guidance in the international area. Proposed rules on the Section 965 repatriation tax were released and guidance on the Global Intangible Low-Taxed Income (GILTI) is in the final stages of government review before release. Final regulations on inversions were also released.
The Senate Finance Committee has now approved the nominations of Charles Rettig to be IRS Commissioner, Michael Desmond as Chief Counsel for the IRS, and Justin Muzinick as Deputy Secretary of the Treasury. Policy disputes with Democrats in the Senate, however, are currently holding up confirmation by the full Senate of all three men with objections lodged by SFC Ranking Member Ron Wyden (D-OR) and Senator Bob Menendez (D-NJ).
For more information on these issues, please contact Susan Rogers at [email protected] or 202.492.3593.
TCJA GUIDANCE
Proposed Regulations Released — Section 965 Transition Tax/Repatriation
On August 1st, Treasury released proposed regulations related to the section 965
transition tax, which imposes a one-time deemed repatriation tax on the accumulated earnings of US
multinationals’ foreign subsidiaries. The 249-page regulation package provides guidance for
taxpayers on including the tax on their 2017 returns.
Section 965 would tax overseas cash holdings at 15.5%, while taxing earnings that are otherwise
invested at 8%, which then allows those funds to be deemed repatriated to the US with no additional
tax cost. Determining how to distinguish between cash and non-cash earnings has proven to be a
difficult task for taxpayers and the IRS. The law included measurement dates of November 2, 2017,
when the tax reform bill was first introduced in the House, and December 31, 2017. The proposed
regulations affect US shareholders, as defined in section 951(b), with direct or indirect ownership
in certain foreign corporations, as under section 965(e). The lower effective tax rates applicable to section
965 income inclusions are reached using a participation deduction set forth in section 965(c). A
reduced foreign tax credit also applies with respect to the inclusion under Code section 965(g).
Taxpayers may generally elect to pay the transition tax in installments over an 8-year period under
section 965(h). The guidance contains detailed information on the calculation and reporting of a
US shareholder’s section 965(a) inclusion amount, as well as information for making the elections
available to taxpayers under section 965.
The new rules generally track earlier guidance and the statutory language rather than
“interpreting” the law in a way that might have a significant impact on companies either to their
benefit or detriment. They provide more detail on issues addressed in prior section 965 notices,
but they also addressed some issues for the first time, including foreign tax credits and basis
adjustments. They do not address specific individual cases despite requests from taxpayers,
stating that to do so would have been difficult to
enforce and Congressional intent was clear.
What’s Next? Global Intangible Low-Taxed Income (GILTI) /Anti-Deferral Regulations?
Treasury has submitted proposed regulations on global tax anti-avoidance rules to the Office of
Management and Budget (OMB) for review. There is no announced date for completion of the review,
but it is expected that these regulations will be released in the coming weeks. Treasury earlier
this year set the release date for October.
The GILTI rules are considered to be a key element of the TCJA international
framework by targeting off-shore tax havens with the intent of ensuring that exempting foreign
income does not result in the exit of significant capital from the US. The GILTI
provisions target income from intangible assets, such as intellectual property, held by US
companies in low-tax foreign jurisdictions. Under this regime, a US shareholder who owns 10% or
more of stock in a foreign corporation generally is required to include such shareholder’s GILTI in
gross income on a current basis. GILTI generally means all net income of a US shareholder’s
controlled foreign corporations (CFCs) with limited exceptions for certain types of income, over
and above a deemed fixed return on the tangible assets of the US shareholder’s CFCs.
The proposed rules are expected to address several outstanding questions on how the tax on GILTI
will work. One outstanding issue is how foreign tax credit (FTC) limitations will apply to income
characterized as GILTI. The FTC rules limit the applicability of FTCs to a ratio of expenses
attributable to the foreign entity paying the taxes, which could
negate a significant part of the GILTI deduction. It has been suggested that Congress did not
intend the limit to apply, but it is not clear whether Treasury will have the legal flexibility to
set an exemption. Other issues that may be addressed include expense
allocation, consolidated filers, and the accumulated earnings tax under section 531.
International Issues — Technical Corrections to the Tax Cuts and Jobs Act (TCJA) and Tax Cuts 2.0
The international area has been identified as a focus of attention for tax writers with respect to
technical corrections and the Tax Cuts 2.0 package currently being drafted by House Republicans.
Based on comments from House Speaker Ryan (R-WI), the technical corrections legislation will likely
not be considered until a lame duck session after the elections and would move separately from the
Tax Cuts 2.0 bills. He commented “We always knew when you switch from a worldwide to a territorial
system and redo everything else, you’re going to have glitches, you’re going to have issues.
We’re compiling those issues, typically on the international side, and then we intend to put
together a technical corrections bill at the end of the year.”
Speaker Ryan indicated that deferring the vote on technical corrections legislation until the lame
duck session would be necessary in order to pick up Democratic support for the bill, as it is
unlikely Democrats would cooperate on moving the bill before the elections.
House Ways & Means Committee Chairman Brady has also said that the House will need to address the
foreign provisions of the TCJA, but these issues were not addressed in the outline he released in
July of the new Tax Cuts 2.0 package. “We didn’t have as much time to model and analyze it,” Brady
said. “Now that we’re getting that feedback, we’re going to be making those changes, fine-tuning
the international side to make sure it hits the mark,” he said adding that changes may be included
in “tax reform phase two and beyond.”
BEPS/International Update
The OECD Secretary-General issued a report to the G20 Finance Ministers covering progress in
implementing the BEPS project, the tax challenges from the digitalization of the economy, and
proposals to increase tax transparency. Also included is an IMF/OECD Report on Tax Certainty for
the G20 that identifies the sources of uncertainty in tax matters and provides approaches to
improve certainty, which range from improving the clarity of legislation and increasing
predictability and consistency of tax administration
practices to effective dispute prevention and resolution.
Republican tax writers in Congress are urging the President to nominate a new ambassador to the
OECD in order to protect changes in the TCJA which could be perceived as a threat to the EU and to
fight against EU efforts to impose a new digital tax that will primarily hit US tech companies.
Treasury historically has assumed a role in protecting US tax policy at the OECD, but they have a
full agenda with guidance for the TCJA. Some tax experts in Europe believe that the OECD is
working to delay the EU digital tax effort, because the OECD is planning to publish a framework for
taxing the digital economy in 2020, signaling a possible turf war on this issue.
Pascal Saint-Amans, the director of the Center for Tax Policy and Administration at the OECD,
recently praised the US in a public interview for implementing parts of the OECD BEPS package
citing specifically the Base Erosion Anti-Abuse Tax (BEAT), which limits deductions on payments by
a US corporate entity to related parties abroad, thereby ensuring that it doesn’t reduce its US
taxable income to less than 10 percent. He believes that the US will be more open in the future to
updating transfer pricing rules at the OECD in light of the underlying philosophy of this tax.