The Proposed Section 951A Regulations The First Round of GILTI Guidance

Transcription

1 The Proposed Section 951A Regulations The First Round of GILTI Guidance Wednesday, October 10, :30 3:00 pm ET If you experience any technical difficulties, contact or Please disable pop-up blocking software before viewing this webcast

2 Today's presenters David Sites Partner, Technical Leader, International Tax Washington National Tax Office Dean Jorgensen National Partner David Zaiken Managing Director, International Tax Washington National Tax Office Eric Gabbai Senior Manager, International Tax Cory Perry Senior Manager, International Tax Washington National Tax Office Mike Del Medico Manager, International Tax Washington National Tax Office

3 Learning objectives At the end of the session, participants will be able to: Demonstrate a working knowledge of what's included in the proposed regulations under section 951A Describe how the proposed regulations may impact your organization or personal tax situation Identify unique fact patterns to which the regulations apply and assess the impact 3

4 Agenda Introduction Global intangible low-taxed income mechanics Treatment of Consolidated Groups Treatment of Partners in Partnerships The pro rata share rules for GILTI and Subpart F Other notable guidance and financial statement considerations 4

5 Introduction Section 951A proposed regulations

6 GILTI proposed regulations On Sept. 13, the IRS released much-anticipated proposed regulations (REG ) addressing GILTI Members of consolidated groups get "pseudo" consolidated treatment Partnership "mash up" of the aggregate and entity theory for partners in partnerships Updated (and revised) pro-rata share rules Complex basis adjustment mechanisms The rules may impose a significant increased burden on many taxpayers Taxpayers should begin carefully assessing the guidance and be prepared to compute GILTI on an annual basis Effective date Generally, the taxable years of foreign corporations beginning after Dec. 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end (Consistent with Sec. 951A) 6

7 GILTI proposed regulations Consolidated group rules Pro-rata distribution rules What was included? Domestic partnership rules Basis adjustments Reporting requirements 7

8 GILTI proposed regulations Foreign tax credit rules What was not covered? Expense allocation rules Interaction of 163(j) with tested income calculations Application of section 962 elections Treasury deferred on some the most talked about and uncertain areas. However, treasury expects this set of regulations to be tranche 1 of 3, with foreign tax credit and section 250 deduction regulations to follow. 8

9 Initial takeaways Tested Income/Loss is calculated using a taxable income approach (same approach as subpart F) No de minimis exception or current year E&P limitation Numerous changes/clarifications to interest expense/income treatment Three new anti-abuse rules require asset-by-asset analysis and may have unintended consequences New reporting requirements include Schedule I-1 to be attached to Form 5471, and Form 8992 Complex partnership rules that apply a hybrid of entity and aggregate theory Consolidated return rules that allow for a quasi-combined approach 9

10 GILTI mechanics The basics on calculating the section 951A inclusion

11 Global Intangible Low Taxed Income Section 951A Global Intangible Low-Taxed Income Included In Gross Income Of United States Shareholders Imposes a minimum tax on certain foreign income described as "global intangible lowtaxed income" (GILTI) Discourages income shifting incentives by subjecting income to current U.S. tax U.S. Shareholders of one or more CFCs are subject to current U.S. tax on its GILTI Domestic corporations can obtain a deduction equal to 50% of the GILTI inclusion (subject to taxable income limits) Effective date Taxable years of foreign corporations beginning after Dec. 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end 11

12 GILTI Overview Gross Gross Income income of of CFC CFC _ Exceptions (e.g., Subpart F, related party dividends, etc.) _ Allocable Allocable Deductions deductions = Allocable Deductions CFC tested income or loss Qualified Qualified Business Business asset Asset investment Investment 10% return of CFC tested income and loss = X _ Specified Interest Expense U.S. shareholder-level items CFC-level items Qualified Business asset Tested investment interest expense _ Qualified Business asset Tested investment interest income U.S. Shareholder's net tested income or loss _ = U.S. Shareholder's Net Deemed Tangible Income Return Global Intangible Low-taxed Income 12

13 Push down of GILTI Inclusion The GILTI inclusion amount is then allocated (or pushed) back down to the CFCs to determine previously taxed income, and other relevant calculations based on the respective entities' calculated inclusion The GILTI inclusion is pushed down to the CFCs in the following manner In the case of a tested loss CFC, zero, and In the case of a tested income CFC, the portion of the GILTI inclusion amount multiplied by the ratio of the tested income of the tested income CFC over the aggregate amount of tested income of each tested income CFC for the U.S. shareholder inclusion year GILTI inclusion amount allocated to a tested income CFC is translated into the functional currency of the tested income CFC using the average exchange rate for the CFC inclusion year of the tested income CFC 13

14 Tested income or loss Tested income is gross income without regard to certain exceptions Net tested income is the excess of tested income over deductions Net tested losses occur when deductions exceed gross income Under Treas. Reg. Sec (a)(1) and Prop. Treas. Reg. Sec A-2(c)(2), tested income or tested loss of a CFC is determined by treating the CFC as a domestic corporation taxable under Section 11 and by applying the principles of Section 61 and the regulations thereunder Effectively connected income Exceptions from gross tested income Subpart F Income Income excluded under the high-tax exception Dividends received from certain related parties Foreign oil and gas extraction income, over deductions allocable to such gross income 14

15 Tested Income Other items of note Taxpayers must prepare a taxable income calculation for all CFCs in order to determine GILTI All taxable income adjustments must be considered The preamble provides that issues related to sections 163(j), 245A and 267A will be addressed in future guidance The proposed regulations provide that tested income and tested loss are determined without regard to the application of section 952(c) (e.g., Earnings and profits limitation, qualified deficits, etc.) The proposed regulations clarify the "high-tax exception" applies only to income that is excluded from foreign base company income and insurance income solely by reason of an election made to exclude the income under the high-tax exception of section 954(b)(4) The proposed regulations provided no rules to carryforward or carryback tested losses 15

16 Net deemed tangible income return Net deemed tangible income return (NDTIR) equals 10% times the CFCs aggregate adjusted basis in "qualified business asset investment" ("QBAI") over specified interest expense QBAI is the quarterly average of the aggregate of CFCs adjusted bases in specified tangible property (STP) STP means tangible property used in the production of gross tested income None of the tangible property of a tested loss CFC is specified tangible property (annual determination) Tangible property means property for which a deduction under section 167(a) is eligible to be determined under section percent NDTIR X CFC basis in depreciable property Less Specified interest expense Specific rules for dual use property 16

17 Specified Interest Expense Specified interest expense means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of The aggregate of the shareholder s pro rata share of the tested interest expense of each CFC for the year, over The aggregate of the shareholder s pro rata share of the tested interest income of each CFC for the year A netting approach is provided in the proposed regulations in lieu of the tracing approach provided under the statue when determining the amount of interest expense Specified interest expense of tested loss CFCs will reduce QBAI of other tested income CFCs, despite not being able to include QBAI of the tested income CFC Targets strategy of consolidating all offshore debt at a single tested loss CFC 17

18 Treatment of Consolidated Groups Application of the GILTI rules to group members

19 Pseudo-single shareholder approach Prop. Treas. Reg. Sec was added for consolidated GILTI computations Enacted a pseudo single shareholder approach by allocation of aggregated tested loss, QBAI, and specified interest expense to each member based on the GILTI allocation ratio CFC computations Tested income, tested loss, QBAI, tested interest income and expense (Tested Items) Member computations Members calculate their pro rata share of CFC Tested Items Parent computations Consolidated group tested income, consolidated group tested loss, consolidated group QBAI, consolidated group specified interest expense Member push down in calculation of GILTI inclusion GILTI Allocation Ratio Member's tested income divided by consolidated group tested income 19

20 Prop. Treas. Reg. Sec (f), Example 1 Results First, consolidated group tested income and the GILTI allocation ratio are determined USS1 has no tested income, USS2 has tested income of 200, USS3 has tested income of 600 The GILTI allocation ratio is determined by dividing each member's tested income by the consolidated group tested income The consolidated group tested loss is then determined USS1 has a tested loss of (100), USS2 has a tested loss of (200) and USS3 has no tested loss Tested loss is then allocated to each member using the GILTI allocation ratio USS1 does not have a GILTI allocation ratio and therefore has no allocated tested loss, USS2 is allocated (75) ((300)*.25), USS3 is allocated (225) ((300)*.75) Net CFC tested income is determined at the member level by reducing a member's tested income by their allocated share of tested loss USS1 CFC1 Tested Loss: (100) USP USS1 USS2 USS3 Aggregate Consolidated Group Tested Income GILTI Allocation Ratio - 25% 75% 100% Consolidated Group Tested Loss (100) (200) (300) Allocable Shares of Tested Loss CFC2 Tested Income: 200 USS2 - CFC3 Tested Loss: (200) USS3 CFC4 Tested Income: 600 (75) (225) (300) Net CFC Tested Income

21 Prop. Treas. Reg. Sec (f), Example 3 Results CFC 1 and CFC 4 each have tested interest expense of 25 which has been taken into account in their tested income calculations None of the CFCs have tested interest income CFC 2 and CFC 4 have QBAI of 500 and 2000, respectively Consolidated group QBAI is allocated using the GILTI allocation ratio determined on the prior slide Specified interest expense is determined at the consolidated group level by aggregating each member's tested interest expense and reducing it by the aggregated tested interest income amount Specified interest expense is $50 ( )- (0+0+0) Specified interest expense is then allocated to each member using the GILTI allocation ratio USS1 CFC1 QBAI: 0 TIE: 25 USP USS1 USS2 USS3 Aggregate Consolidated Group QBAI GILTI Allocation Ratio CFC2 QBAI:500 TIE: 0 USS2 CFC3 QBAI: 0 TIE: 0 USS3 CFC4 QBAI: 2000 TIE: 25-25% 75% 100% Allocable Shares of QBAI Consolidated Group Specified Interest Expense Allocable Shares of Consolidated Specified Interest Expense

22 Prop. Treas. Reg. Sec (f), Example 3 Results Each member's Net Deemed Tangible Income Return is determined by multiplying their allocable share of QBAI by 10% and reducing that amount by the member's allocable share of specified interest expense The Net Tested Income of each member is reduced by their Net Deemed Tangible Income Return to determine their respective GILTI Inclusion Amount USS1 USS2 USS3 Aggregate Tested Income Qualified Business Asset investment (QBAI) ,500 Tangible Return Rate 10% 10% 10% 10% Routine Return Specified Interest Expense Net Deemed Tangible Income Return (NDTIR) Global Low Tax Intangible Income

23 Treatment of Partners in Partnerships Application of the GILTI rules to domestic partnerships & their partners

24 Application to domestic partnerships Treasury determined that the approach that best harmonizes the treatment of domestic partnerships and their partners across all provisions of the GILTI regime is neither a pure aggregate nor a pure entity approach but rather a hybrid The proposed regulations treat a domestic partnership as: an entity with respect to partners that are not U.S. shareholder partners of any CFC owned by the partnership, or an aggregate for purposes of partners that are U.S. shareholder partners with respect to one or more CFCs owned by the partnership. A number of policy reasons highlighted in the preamble to the proposed regulations were presented to justify this hybrid approach Special rules apply to tiered partnerships 24

25 Applicable Definitions US1 5% 95% U.S. shareholder partnership 100% Partnership CFC Tested Income: 1000 QBAI: 100 Tested Interest Exp: 25 U.S. shareholder partner U.S. shareholder partner: a U.S. person that is a partner in the U.S. shareholder partnership and that is also a U.S. shareholder (as defined in section 951(b)) of the partnership CFC U.S. shareholder partnership: a domestic partnership that is a United States shareholder of one or more CFCs Partnership CFC: a CFC which is owned (within the meaning of section 958(a)) by the U.S. shareholder partnership CFC tested item: Items computed at the CFC level (tested income, tested loss, qualified business asset investment, tested interest expense, and tested interest income) 25

26 GILTI and Domestic Partnerships US1 CFC1 Tested Income: % 95% 100% DPS US2 CFC2 Tested Loss: 500 Assumptions All entities have the same tax year end, no entities own specified tangible property, and no entities incurred interest expense/income CFC3 100% Tested Loss: 475 Because US1 is not a US shareholder in CFC1 and CFC 2, US1 includes in income its distributive share of the GILTI inclusion computed at DPS (by application or entity theory) US1's GILTI inclusion is $25 Because US2 is a US shareholder partner in CFC1 and CFC2, the aggregate theory applies DPS determines and provides US2 with the CFC tested items of CFC1 and CFC 2 US2 computes its GILTI inclusion by combing its share of the CFC tested items of CFC1, CFC2 and CFC3 US2's GILTI inclusion is $0 (i.e., $950- $475-$475) If US2 were required to apply aggregate theory, its inclusion would have been $475 (with the $475 tested loss going unused) 26

27 The pro rata share rules for GILTI and Subpart F Changes to rules that govern the pro rata share rules for US shareholders

28 Pro rata share rules New proposed regulations modified existing regulations under section 951 U.S. shareholder's share of CFC level-items (e.g., tested income, tested loss, and QBAI) are generally determined in the same manner as Subpart F income Determined by reference to stock ownership within the meaning of section 958(a) Pro rata share of tested income is determined upon proportionate amount of year-end hypothetical distribution QBAI allocation is proportionate to CFC's tested income distributed in hypothetical distribution Prop. Treas. Reg. Sec A-1 contains several exceptions to the general rule, including special rules for preferred stock that limits the QBAI allocation 28

29 Anti abuse rules under section 951 Prop. Treas. Reg. Sec (e)(6) provides: " any transaction or arrangement that is part of a plan a principal purpose of which is the avoidance of Federal income taxation, including, but not limited to, a transaction or arrangement to reduce a United States shareholder s pro rata share of the subpart F income of a controlled foreign corporation, which transaction or arrangement would avoid Federal income taxation without regard to this paragraph (e)(6), is disregarded in determining such United States shareholder s pro rata share " 29

30 Broad anti abuse rules - Example US Parent distributes CFC Stock in 2010 to avoid subpart F inclusions in future tax years Foreign Parent US Parent Query whether Prop. Treas. Sec (e)(6) applies to reallocate some or all of CFC s GILTI or subpart F income to USP? CFC 30

31 Other notable guidance and financial statement considerations Other highlights and issues

32 Financial statement considerations Overview The GILTI provisions, due to the income inclusion, can result in a current U.S. tax provision associated with earnings generated by a controlled foreign corporation If a company makes an accounting policy election to recognize deferred taxes for temporary differences expected to reverse as GILTI in future years, the GILTI provisions may also result in deferred tax consequences An assertion that some or all of the foreign earnings are "indefinitely reinvested" is not relevant For companies issuing interim period financial statements, U.S. generally accepted accounting principles (US GAAP) requires a company to estimate its annual effective tax rate (ETR) for the full year, including the expected annual current and deferred tax provisions Companies are required to estimate the full-year tax effect, both current and deferred (if applicable), of the GILTI provisions in deriving their ETR to be used in the interim period financial statements 32

33 Financial statement considerations Overview SAB 118, which potentially provides companies with additional time to finalize their accounting for the effects of the Tax Cuts and Jobs Act: Is applicable to provisional estimates as of the date of enactment (including deferred taxes if a company makes an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years) Is not applicable to the on-going tax effects of GILTI 33

34 Financial statement considerations Deferred taxes If a company makes an accounting policy election to include the deferred tax effects of GILTI as part of deferred taxes (and not a period cost) The issuance of the proposal regulations may result in new information which may cause adjustments to the expected annual deferred tax provision used in computing the ETR in prior interim periods of the current fiscal year Any such adjustments are recognized as a revision to the ETR being applied in the interim period which includes Sept. 13 th and in each successive interim period 34

35 Financial statement considerations Uncertain tax positions Given the uncertainty regarding the various GILTI provisions and their application, companies may have been required to determine whether an uncertain tax position exists in prior interim periods of the current fiscal year The proposed regulations are a new source of authority in the tax law, among existing sources, to be considered in evaluating whether it is more likely than not that a tax position associated with GILTI will be sustained upon examination based on its technical merits The new information may cause a change in judgment regarding the recognition step (determination as to whether the position is more likely than not) and/or the measurement step (determination of the largest amount of benefit that is greater than 50% likely of being realized upon settlement) If the new information causes a change in judgment with respect to a tax position taken in prior interim periods of the current fiscal year, the impact of the change in judgment is incorporated in a revised ETR being applied in the interim period which includes Sept. 13 th and in each successive interim period The change in judgment must be based on new information, and not a new interpretation or evaluation of information that was reasonably available in the prior interim periods 35

36 Financial statement considerations Internal control over financial reporting Whether annual and/or interim period financial statements are issued, make sure appropriate systems, processes and controls are in place to timely collect accurate data and to accurately perform the GILTI calculation This requires data and computations beyond that usually done with respect to controlled foreign corporations, e.g., the required data for the calculation of "net CFC tested income" to determine whether it exceeds the "net deemed tangible income return," thereby resulting in an income inclusion Monitor the issuance of the additional IRS regulatory guidance to determine its impact on positions taken in prior interim (or annual) periods If new information becomes available from the forthcoming regulatory guidance that causes a change in judgment with respect to a tax position taken in a prior annual period, the effect of such change in judgment is generally considered a discrete tax item in the period in which such change occurs A subsequent return-to-provision adjustment, if based on information that was reasonably available at the time that the prior financial statements were prepared, may constitute a correction of an error (and an internal control weakness) 36

37 Basis adjustment rules Used Tested loss For certain purposes, a U.S. shareholder must reduce its CFC stock basis by the amount of tested loss used to offset tested income in calculating its net CFC tested income The downward basis adjustment is deferred until the disposition of the underlying stock If downward basis adjustment exceeds stock basis, excess treated as gain from sale or exchange in year of disposition Base adjustments only to extent a net tested loss of CFC has been used Special rules for computing when tested losses used in consolidated groups 37

38 Basis adjustment example Used tested losses Analysis At the time of the sale, USP has a net used tested loss amount of 90 with respect to CFC2 Immediately prior to the disposition of the CFC2 stock, the basis of the CFC2 stock is reduced by 90 to 10 USP recognizes gain of 0 (10 (100 90)) Without the basis adjustment, USP would recognize a loss of 90 on the sale of CFC2 stock Rule prevents duplicative benefits of losses shared with CFC1 CFC1 Year 1 - Tested Income: 100 Adjusted basis: % USP At the beginning of year 2, USP sells CFC 2 for 10 CFC2 Year 1 - Tested Loss: 90 Adjusted basis: 100 Assumptions All entities use calendar year as their taxable year USP has no used tested loss amount or offset tested income amount with respect to CFC2 in any year prior to Year 1 USP has not owned stock in any other CFC by reason of owning stock of CFC1 and CFC2 Third Party 38

39 Anti abuse rules Disallowance of stepped up basis for purposes of calculating QBAI when specified tangible property is transferred between related CFCs between 12/31/17 and first inclusion year of transferor Disallowance of stepped up basis specified property (includes intangibles) for purposes of calculating tested income or tested loss of the transferee CFC Specified tangible property is disregarded if acquired with principle purpose of reducing a GILTI inclusion and is held temporarily over at least one quarter end (includes per se rule if held <12 months) Target transactions undertaken by a CFC to reduce GILTI by obtaining step-up in the basis of assets prior to the effective date of GILTI rules ("donut hole planning") 39

40 Anti abuse rules Prop. Treas. Reg. Sec A-3(h)(2)(iii), Example 1 Analysis Transaction is a transfer of STP between related persons during the disqualified period Disqualified period is 1/1/2018 to last day of CFC inclusion year of CFC 2 (11/30/18) Disqualified basis is $60 - excess of CFC1s adjusted basis after the disqualified transfer ($100), over the sum of the property immediately before the transfer ($10) and USP's pro rata share of the Subpart F income ($30) $60 is not taken into account for purposes of determining QBAI or tested income of CFC 1 CFC1 12/31 YE USP 12/31 YE 100% 100 Adjusted Basis: 10 Fair market value: 100 Gain: 90 (FPHCI: 30) CFC2 11/30 YE CFC 2 sells specified tangible property CFC 1 on 11/1/

41 Any final questions? 41

42 Today's presenters David Sites Partner, Technical Leader, International Tax Washington National Tax Office Dean Jorgensen National Partner David Zaiken Managing Director, International Tax Washington National Tax Office Eric Gabbai Senior Manager, International Tax Cory Perry Senior Manager, International Tax Washington National Tax Office Mike Del Medico Manager, International Tax Washington National Tax Office

43 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser

44 Disclaimer * * * * * * * * * * * * * * * * * * * * * * IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this PowerPoint is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein. * * * * * * * * * * * * * * * * * * * * * The foregoing slides and any materials accompanying them are educational materials prepared by Grant Thornton LLP and are not intended as advice directed at any particular party or to a client-specific fact pattern. The information contained in this presentation provides background information about certain legal and accounting issues and should not be regarded as rendering legal or accounting advice to any person or entity. As such, the information is not privileged and does not create an attorney-client relationship or accountant-client relationship with you. You should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current legal developments, verdicts or settlements. You may contact us or an independent tax advisor to discuss the potential application of these issues to your particular situation. In the event that you have questions about and want to seek legal or professional advice concerning your particular situation in light of the matters discussed in the presentation, please contact us so that we can discuss the necessary steps to form a professional-client relationship if that is warranted. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd. All rights reserved. Printed in the U.S. This material is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd.

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