The Proposed Section 59A Regulations The Base Erosion Anti-Abuse Tax

Transcription

1 The Proposed Section 59A Regulations The Base Erosion Anti-Abuse Tax Please disable pop-up blocking software before viewing this webcast January 22, :00-3:00pm ET

2 Today's presenters David Sites Partner, Technical Leader, International Tax Washington National Tax Office David Zaiken Managing Director, International Tax Washington National Tax Office 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 59A Describe how the proposed regulations may impact your organization Identify unique fact patterns to which the regulations apply and assess the impact 3

4 Agenda 1 Introduction 2 Applicable taxpayer rules Base erosion payments and base erosion tax benefits Modified taxable income Base erosion minimum tax amount Partnerships and consolidated return treatment 4

5 Introduction Section 59A and the proposed regulations

6 Base erosion anti-abuse tax Sec. 59A Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts (commonly called BEAT) Applicable taxpayers that make excessive "base erosion payments" (BEPs) will be subject to a minimum tax on modified taxable income Modified taxable income is generally taxable income computed without regard to certain BEPs and net operating losses attributable to BEPs BEPs are generally amounts paid or accrued to a foreign-related party for which a deduction is allowable (including certain depreciation and amortization) Effective Date - Amounts paid or accrued in taxable years beginning after Dec. 31,

7 BEAT proposed regulations On Dec. 13, the IRS released proposed regulations (REG ) resolving many threshold questions surrounding the BEAT regime brought about by the Tax Cuts and Jobs Act (TCJA) The package contains nearly 200 pages of regulations and preamble The proposed regulations apply to taxable years beginning after December 31, 2017 (however, if not finalized by June 22, the IRS generally expects the regulations to be effective for tax years ending on or after December 17, 2018) In light of the retroactive effective date, taxpayers should carefully assess how the proposed regulations impact their specific tax circumstances. The proposed regulations were released under Sections 59A, 383, 1502, 6038A, 6038C, and

8 Initial takeaways The proposed regulations provide critical guidance in a number of areas, and resolved a number of issues favorable for taxpayers. Notable aspects of the proposed regulations include: An exception from the definition of BEP for amounts that are subject to tax as income effectively connected with the conduct of a U.S. trade or business Favorable transition rules addressing BEPs and net operating losses (NOLs) originating before the effective date Clarification that the services cost method exception is available if there is a markup, but that the portion of any payment that exceeds the cost of services is not eligible for the exception and is a BEP 8

9 Initial takeaways Other notable aspects of the proposed regulations are: Absence of a so-called netting exception for taxpayers hoping to offset corresponding income items against BEPs for BEAT purposes. Provided an unanticipated rule that clarifies a payment or accrual may be a BEP regardless of whether it is in exchange for non-cash consideration (e.g., property contributed in exchange for stock in a Section 351 transfer) The regulations employ an "add-back" approach for determining modified taxable income 9

10 The BEAT calculation A Determine if taxpayer is Applicable Taxpayer Step 1: Determine taxpayer's aggregate group Step 2: Determine group's gross receipts Step 3: Determine group's base erosion percentage Step 4: If Applicable Taxpayer, perform the following calculation: B Determine BEPs and related benefit Certain Tax Credits C Calculate MTI Base Erosion Minimum Tax Amount Calculate BEMTA D 10

11 Applicable taxpayer rules

12 Applicable taxpayer BEAT applies to an "Applicable Taxpayer" which means: A taxpayer which is a U.S. corporation (or a foreign corporation with ECI) other than a RIC, REIT, or S corporation, with both: The average annual gross receipts of which for the 3-taxable years period ending with the preceding taxable year are at least $500 million ("Gross Receipts Test"), and The base erosion percentage for the taxable year is at least 3% (2% for banking or securities dealer groups) 12

13 Aggregation rule A taxpayer that is a member of an aggregate group determines its gross receipts and its base erosion percentage on the basis of the "aggregate group." Aggregate Group means a group of corporations: All persons treated as a single employer under Sec. 52 (applying a 50% ownership rule) would treat as single employer with the following modification to Sec. 52: When applying Sec for purposes of Sec. 52 the exception for foreign corporations shall be disregarded 13

14 Aggregation rule Aggregate group rules under the proposed regulations: Foreign corporations would be excluded except with regard to income that is treated as ECI, or if a tax treaty applies applicable to a U.S. permanent establishment ("PE") If an aggregate group owns a partnership interest, the distributive share of partnership items is handled at the partner level Payments between members of the aggregate group are disregarded Each taxpayer in a group determines its gross receipts and base erosion percentage by reference to its own taxable year Taking into account other member's results that occur during the taxpayer's taxable year Predecessor rules on tax free reorganizations 14

15 Aggregation rule Foreign Parent U.S. ECI Branch 100% 100% U.S. Parent 100% U.S. Parent 100% 100% U.S. Sub U.S. Sub >50% ownership threshold applies in determining the controlled group *Each taxpayer computes BEAT on an individual basis 15

16 Gross receipts test Gross Receipts Test Gross Receipts are determined using rules similar to the rules in Sec. 448(c)(3)(B),(C),(D). In the case of a foreign person, only gross receipts which are taken into account in determining ECI is taken into account. This shall not apply to the gross receipts of any U.S. person which are aggregated with the taxpayer's gross receipts by reason of section 59A(e)(3) (aggregation rules). 16

17 Gross receipts test The Gross Receipts Test is clarified in the proposed regulations in the following ways: Gross receipts has the same meaning as contained in Treas. Reg. Sec T(f)(2)(iv) Broad definition which includes Subpart F, and GILTI inclusions under section 951A For consolidated groups, gross receipts is determined under a consolidated approach with intercompany receipts eliminated For taxpayers that have not been in existence for the three year period, the average is determined for the time it was in existence Short taxable years are annualized Predecessor's income is included in gross receipts who was acquired in a Section 381(a) transaction 17

18 Example Gross receipts test Foreign Parent Foreign Sub 2 Foreign Sub 1 U.S. Sub U.S. Consolidated Group U.S. Branch Foreign Branch Gross receipts ECI Gross receipts (excluding ECI) Total Foreign Parent $0M $120M $120M Gross receipts test U.S. Consolidated Group $0M $120M $120M $120M U.S. Sub $0M $300M $300M $300M Foreign Sub 1 $0M $325M $325M Foreign Sub 2 U.S. Branch $20M N/A $20M $20M Foreign Branch N/A $120M $120M $0M Total $1,005M $440M < $500M 18

19 Base erosion percentage Base erosion percentage test is satisfied if the taxpayer/aggregate group has a base erosion percentage of 3% or more. (lower threshold for domestic banks and registered securities dealers) Base Erosion percentage means for any taxable year the percentage determined by dividing the aggregate amount of base erosion tax benefits, by the sum of: Aggregate amount of all deductions (including base erosion deductions), and depreciation/amortization plus insurance payments taken into account under Secs. 803(a)(1)(B) or Sec. 832(b)(4)(A) Base Erosion Percentage = Aggregate amount of base erosion tax benefits Aggregate amount of all deductions * including base erosion deductions and depreciation/amortization plus insurance payme nts 19

20 Base erosion percentage Taxpayer satisfies the base erosion percentage test if it has a base erosion percentage for the taxable year of 3% or more (2% for banks and securities dealers) De minimis exception that would apply if the total gross receipts of the aggregate group that are attributable to the bank/ securities dealer are less than 2% of the aggregate gross receipts of the group Denominator is reduced by certain amounts including: Deductions allowed under sections 172, 245A, and 250 Deductions qualifying for SCM exception Deductions qualifying as qualifying derivative payment Exchange losses under section 988 Any deduction not allowed in computing taxable income Adjustments to numerator are also required - a base erosion tax benefit is not included in the numerator when the payments is subject to U.S. tax (e.g., under sections 871, 881, 1441, 1442) Special scaling rule for payments subject to a reduced rate 20

21 Base erosion payments and base erosion tax benefits

22 Base erosion payments ("BEPs") Base erosion tax benefits are generally the deductions or reductions in gross income that result from base erosion payments. Base Erosion Payments include: Any amount paid or accrued to a foreign person which is a related party Any amount related to depreciation or amortization of amounts paid or accrued to a foreign related party for the acquisition of property subject to depreciation or amortization Reinsurance payments taken into account under Secs. 803(a)(1)(B) or 832(b)(4)(A) Amounts paid to Surrogate Foreign Corporations that became Surrogate Foreign Corps after Nov. 9, 2017 that are considered payments to reduce Gross Receipts (e.g. COGS) 22

23 Base erosion payments ("BEPs") A loss recognized on the transfer of property from a taxpayer to a foreign related party is considered to be a BEP Amounts equivalent to deductible payments used in computing the business profits of a permanent establishment ("PE") resulting from treaty-based expense allocation between a home office and PE ("internal dealings") or other foreign branches may be treated as BEP. Deductions properly allocable to a U.S. trade or business with ECI are BEPs to the extent that they were paid or accrued to a foreign related party The regulations trace each item of deduction to determine whether it arises as a result of a payment to a foreign related party 23

24 Tax-free transactions/non-cash payments The proposed regulations clarify that a payment by a taxpayer to a foreign related party may be a BEP regardless of whether consideration is in the form of cash or non-cash items This may include a non-cash payment to a related party in a transaction that also qualifies under a non-recognition provision under sections 351, 332, or 368 Specific exceptions for these types of transactions DO NOT exist Therefore, the acquisition of property in a carryover basis transaction (i.e. a reorganization) will carry with it the consequence of BEP status for the resulting depreciation or amortization amounts. 24

25 BEPs: Exceptions Section 59(d)(5) provides that a BEP does not include amounts paid for services eligible for the services cost method ("SCM") under section 482 The proposed regulations make a key clarification that the services cost method exception is available if there is a markup, but that the portion of any payment that exceeds the total cost of services is not eligible for the exception and is a BEP Adequate books and records most be maintained by the taxpayer to permit verification of the amount charged out for the services and the computation of the mark-up (if any) paid Amounts that are subject to tax as income effectively connected with a U.S. trade or business (in the hands of the recipient) are not BEPs Other exceptions exist for example: interest paid or accrued on TLAC securities, and qualified derivative payments 25

26 Base erosion tax benefits Base erosion tax benefits are an input in computing base erosion percentage and the determination of modified taxable income Generally, they are the amount of deduction related to any base erosion payment for the taxable year Special rules exist for withholding payments: The base erosion tax benefit of a payment to a foreign related party is reduced to zero if the payment is subject to full U.S. WHT If a treaty reduces the amount of WHT imposed, the BEP is treated as a base erosion tax benefit to the extent of the reduction A reduction of deductible interest resulting from section 163(j) is treated as allocable first to unrelated persons and then related parties. The related party interest is then considered paid proportionately between foreign and domestic related parties The Proposed Regulations provide that any disallowed disqualified interest under Section 163(j) that resulted from a payment or accrual to a foreign related party and that is carried forward from a taxable year beginning before January 1, 2018, is not a base erosion payment 26

27 Modified taxable income

28 Modified taxable income Modified taxable income is taxable income determined without regard to (a) base erosion tax benefits and (b) the base erosion percentage of any NOL deduction The proposed regulations clarify a number of computational matters related to modified taxable income, including: Modified taxable income follows a taxpayer-by-taxpayer approach Calculation is done on an add-back basis (i.e., taxable income is not completely recomputed) A U.S. consolidated group is treated as a single taxpayer 28

29 Modified taxable income If a taxpayer has a current year loss (i.e., excess of deductions over gross income), the taxpayer will be considered to have negative taxable income for the year as the starting point for the modified taxable income calculation However, NOL carryover's to the taxable year cannot reduce taxable income below zero as the starting point for purposes of the MTI calculation. When adding back net operating losses for purposes of computing modified taxable income, the base erosion percentage of the "vintage year" (the year in which the loss arose) is applied to the NOL NOLs arising in taxable years prior to 2018 would have a base erosion percentage of zero The relevant base erosion percentage is the percentage for the aggregate group 29

30 Base erosion minimum tax amount

31 Base erosion minimum tax Tax imposed in addition to other taxes (e.g. regular tax) 10% of modified taxable income, (5% for 2018, 12.5% for years beginning after Dec. 31, 2025) over, Regular Tax liability (defined in Sec. 26(b)) reduced by credits allowed over the sum of: R&D plus 80% of applicable Section 38 credits or the base erosion tax amount. Applicable Sec. 38 Credits: include Low income housing provided (Sec. 42(a)); Renewable electricity production credit (Sec. 45(a)); Investment credit (Sec. 46) For tax years beginning after Dec , regular tax liability is decreased by all credits as opposed to only R&D and 80% amount for applicable credits. Rate increased by 1% for any member of an affiliated group (Sec. 1504(a)(1)) which is a bank, or a registered securities The proposed regulations provide that credits for overpayment of taxes and for taxes withheld at source (i.e., credits under Sections 37 and 33, respectively) are not subtracted from the taxpayer s regular tax liability. 31

32 Partnerships and consolidated return treatment

33 Partnership rules Partnerships are not included in the definition of an "applicable taxpayer" The proposed regulations generally apply an aggregate approach when determining gross receipts for evaluating whether a corporation is an applicable taxpayer, and also when addressing the treatment of payments made by a partnership or received by a partnership Amounts paid or accrued by the partnership are treated as paid by each partner to the extent allocable to the partner under section 704 Amounts paid to or accrued to a partnership are treated as received by the partner to the extent allocable under section 704 A de minimis exception applies to partners with small ownership interests 33

34 Consolidated tax returns Affiliated groups included in a consolidated tax return are treated as one taxpayer and compute their BEAT liability on a single taxpayer basis. Determined at the consolidated level as opposed to individual member. Comparison to regular tax is made on a consolidated level. Intercompany transactions are not taken into account for purposes of calculating the BEMTA. 34

35 Any final questions? 35

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

37 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

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