International tax update. 1 May 2018

Transcription

1 International tax update 1 May 2018

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2018 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Moderator and presenters Jeff Michalak EY Americas Director, International Tax Services Ernst & Young LLP Colleen O Neil Partner, International Tax Services Ernst & Young LLP Justin Shafer Partner, International Tax Services Ernst & Young LLP Page 3

4 Overview of tax reform Section 245A: DRD Page 4

5 Section 245A: DRD Overview 100% deduction for foreign source portion of dividends received by domestic corporation from specified 10%-owned foreign corporations Section 904 applied without foreign source portion of dividend, and deductions properly allocable/apportioned to income or stock of specified 10%-owned foreign corporation, except to the extent of Subpart F income and global intangible low-taxed income (GILTI) Holding period requirement: 365 days during the 731-day period that begins on the date that is 365 days before the ex-dividend date Effective date: For distributions made after 31 December 2017 Deduction not available for hybrid dividends; CFC to CFC hybrid dividends treated as Subpart F income No foreign tax credit available for foreign tax paid or accrued on qualifying dividends or hybrid dividends 100% deduction available for qualifying dividends received by a CFC for purposes of calculating Subpart F income, but Section 964(e) dividends treated as Subpart F income offset by a 100% deduction available at the US corporate shareholder level to the same extent as would be available for an actual dividend Page 5

6 Section 245A: DRD Example 1 Corporate US shareholder of the distributing corporation Distribution made after 12/31/17; not a hybrid dividend $100 distribution on 1/1/18 No corresponding deduction or other tax benefit in CFC s jurisdiction USP CFC Stock basis: $2,000 Held for 13 months Not an extraordinary dividend under Section year holding period Earnings that will give rise to a foreignsource portion As of the close of the distribution year of CFC: Undistributed foreign earnings: $400 Undistributed earnings: $800 Specified 10%- owned foreign corporation Page 6

7 Section 245A: DRD Example 2 USP Corporate US shareholder of the distributing corporation Distribution made after 12/31/17; not a hybrid dividend $100 distribution on 1/1/18 No corresponding deduction or other tax benefit in CFC s jurisdiction CFC1 CFC2 Stock basis: $2,000 Held for 13 months Not an extraordinary dividend under Section year holding period Earnings that will give rise to a foreignsource portion As of the close of the distribution year of CFC: Undistributed foreign earnings: $400 Undistributed earnings: $800 Specified 10%- owned foreign corporation Page 7

8 Section 245A: DRD Open issues How relevant is Section 245A outside of companies in a PTI-dominant world? Beware of Section 904(b)(5) Amendment to Section 246(a)(1) intended to amend Section 246(b)(1)? Page 8

9 Section 951A: GILTI Page 9

10 Section 951A: GILTI Overview A US shareholder of any CFC for any taxable year must include in gross income its global intangible low-taxed income (GILTI) for such taxable year Effective date: For tax years of foreign corporations beginning after 31 December 2017, and for tax years of US shareholders in which or with which such tax years of foreign corporations end A US shareholder s GILTI for any taxable year equals the excess (if any) of: Such US shareholder s net CFC tested income for such taxable year, over Such US shareholder s net deemed tangible income return for such taxable year GILTI Net CFC tested income Net deemed tangible income return The inclusion of GILTI is generally similar to inclusion of Subpart F income Page 10

11 Section 951A: GILTI Definitions Net CFC tested income with respect to any US shareholder is the excess (if any) of: The aggregate of such shareholder s pro rata share of the tested income of each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder, over The aggregate of such shareholder s pro rata share of the tested loss of each CFC with respect to which such shareholder is a US shareholder for such taxable year of such US shareholder Net deemed tangible income return with respect to any US shareholder is the excess (if any) of: 10% of the aggregate of such shareholder s pro rata share of the qualified business asset investment (QBAI) of each CFC, over The amount of interest expense allocable to net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining net CFC tested income Page 11

12 Section 951A: GILTI Foreign tax credit and gross-up New Section 960(d): A domestic corporation is deemed to have paid foreign income taxes equal to 80% of: Its inclusion percentage (GILTI divided by the aggregate of its pro rata shares of the tested income of its CFCs); multiplied by The aggregate tested foreign income taxes (foreign income taxes paid or accrued by a CFC properly attributable to tested income taken into account by the domestic corporation) New Section 904(d) limitation for non-passive GILTI; no carryback or carryforward of excess FTCs Section 78 gross-up equals 100% of deemed paid taxes (except for purposes of Sections 245 and 245A) Page 12

13 Section 951A: GILTI Example AFR: 1% Tested income <loss> QBAI Interest expense Foreign income taxes CFC CFC <50> 15 CFC3 <50> Aggregate tested income (ATI) A inclusion Aggregate tested loss (50.00) Deduction % (new 250) Net CFC tested income Net inclusion Net of 50% deduction QBAI US tax (20%) % of QBAI % 960 foreign tax credit (80%) GILTI Residual US tax 5.56 Inclusion % 69.44% GILTI/ATI Total tax paid Tested foreign income taxes gross-up (100%) Inclusion % *Taxes Grossed-up GILTI Note: Does not reflect 861 allocation and apportionment Page 13

14 Section 250: deduction for FDII and GILTI Page 14

15 Section 250: deduction for FDII and GILTI Overview For taxable years of domestic corporations beginning after 31 December 2017, but on or before 31 December 2025, a domestic corporation is allowed a deduction equal to the sum (capped at taxable income) of: 37.5% of its foreign-derived deduction eligible income (FDII), and 50% of GILTI and corresponding Section 78 gross-up For taxable years of domestic corporations beginning after 31 December 2025, the percentages are hanged to % and 37.5%, respectively Effective date: For tax years of foreign corporations beginning after 31 December 2017, and for tax years of US shareholders in which or with which such tax years of foreign corporations end Page 15

16 Section 250: deduction for FDII and GILTI Definitions A domestic corporation s FDII is the amount that bears the same ratio to the deemed intangible income of such corporation as the foreign-derived deduction eligible income of the corporation bears to the deduction eligible income of the corporation FDII Foreign-derived deduction eligible income Deemed intangible income Deduction eligible income Page 16

17 Section 250: deduction for FDII and GILTI Definitions Deduction eligible income equals the excess of the domestic corporation s gross income (determined without regard to certain amounts) over the deductions properly allocable to such gross income Items excluded from gross income: Any amount included in gross income under Section 951(a)(1), i.e., traditional Subpart F GILTI income Financial services income Dividends from CFCs of the domestic corporation Domestic oil and gas extraction income Foreign branch income Allocable deductions include taxes and interest Page 17

18 Section 250: deduction for FDII and GILTI Definitions Foreign-derived deduction eligible income means: Any deduction eligible income which is: Property sold (or leased, licensed or exchanged) to non-us persons for use, consumption or disposition outside the US Services provided to any person, or with respect to property, located outside the US Special rules for related-party transactions Property or services provided to unrelated domestic intermediaries does not qualify, even if ultimately a foreign sale/use arises Deemed intangible income equals the excess of deduction eligible income over deemed tangible income return of the corporation The deemed tangible income return of the corporation equals 10% of the corporation s QBAI QBAI determined under GILTI rules except: Includes QBAI that produces deduction eligible income, instead of tested income Determined without regard to whether the corporation is a CFC Page 18

19 Section 250: deduction for FDII and GILTI FDII Gross income from property sold to non-us persons for use outside the US, or services provided to any US person not located in the US (not including certain items of gross income) Gross income (not including certain items of gross income) minus properly allocable deductions Gross income (not including certain items of gross income) minus properly allocable deductions 10% of QBAI Page 19

20 GILTI/FDII Open issues Application to consolidated groups Taxable income limitation does not appear to apply to deduction related to GILTI Section 78 gross-up Circular computation of Section 250 deduction and Section 163(j) limitation Computation of US tangible asset basis under ADS required? Loss transactions included in FDDEI? Related-party intermediary issues for FDDEI GILTI taxable income computation, e.g., NOL deductions? Tested loss/section 952(c) coordination rule Pro rata share computation for tested losses and QBAI Page 20

21 GILTI/FDII Open issues Ten percent QBAI return is deemed tangible income even in short tax years? Partnership rules for QBAI added in conference Page 21

22 Foreign tax credit changes Page 22

23 Foreign tax credit changes Section 904 Section 904(d)(1) is amended to provide new separate categories (baskets) for: Foreign branch income GILTI inclusions under Section 951A Foreign branch income New Section 904(d)(2)(J)(i) provides that the term foreign branch income means the business profits of such US person which are attributable to one or more qualified business units (as defined in Section 989(a)) in one or more foreign countries. The amount of business profits attributable to a qualified business unit shall be determined under rules established by the Secretary. Section 904(d)(3) look-through rule not amended Provides for an exception to otherwise passive basket income (dividends, interest, rents and royalties) paid by a CFC to a US shareholder to the extent not paid from or deducted against passive income of the payer Default FTC basket pursuant to Section 904(d)(1)(A) is General Limitation; therefore, payments that do not meet the passive exception of Section 904(d)(3) are General Limitation basket income, regardless of the income the payments are made from or deducted against Page 23

24 Foreign tax credit changes Section 904 Old rules Baskets New rules Baskets General Limitation 904(d)(1)(B) General Limitation 904(d)(1)(D) GILTI/951A 904(d)(1)(A) Passive 904(d)(1)(A) Passive 904(d)(1)(C) Foreign Branch 904(d)(1)(B) Treaty Baskets 904(d)(6) Treaty Baskets 904(d)(6) Page 24

25 Foreign tax credit changes Section 904 example Example 1 USP owns CFC CFC has Subpart F income of 10; tangible income return of 20; and GILTI E&P of 50 USP inclusion Passive income 10 GILTI 50 Potential Section 245A exempt income 20 Example 2 Same as Example 1 except that CFC pays interest of 20 to USP USP inclusion Passive income 10 all attributable to interest GILTI 50 General limitation 10 (tangible income return reduced by interest) Potential Section 245A exempt income 10 USP CFC USP CFC Example 1 USP Inclusion Passive 10 GILTI 50 Potential 245A - if dividend paid 20 Category Passive subpart F 10 Assumed deemed tangible return 20 GILTI earnings 50 Example 2 USP Inclusion Passive 10 GILTI 50 GL 10 Potential 245A - if dividend paid 10 Category Passive subpart F 10 Assumed deemed tangible return 20 GILTI earnings 50 Interest expense (20) Page 25

26 Foreign tax credit changes Sections 901, 902 and 960 Direct foreign taxes Foreign taxes incurred directly by US taxpayers (foreign tax on branch income and withholding taxes) remain creditable under Section 901. Indirect foreign tax Section 902 is repealed effective for taxable years of foreign corporations beginning after 31 December 2017, and for taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. Section 960 as amended is the sole mechanism to claim indirect FTCs on foreign taxes paid by foreign corporations. Highlights: Indirect credits only available from CFCs. No FTC ever available from companies All US shareholders qualify for FTCs. Section 958(b) remains relevant for that determination. No direct ownership limitation No tier limitation on indirect credits Page 26

27 Foreign tax credit changes Section 960 Amended Section 960(a): For purposes of Subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under Section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation s foreign income taxes as are properly attributable to such item of income New Section 960(d): For purposes of Subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under Section 951A, such domestic corporation shall be deemed to have paid foreign income taxes equal to 80 percent of the product of (a) such domestic corporation s inclusion percentage, multiplied by (b) the aggregate tested income taxes paid or accrued by controlled foreign corporations Page 27

28 Foreign tax credit changes Section 960 Section 960(b) redesignated as Section 960(c) Prior Section 960(c) repealed. Anti-hopscotching rule for Section 956 inclusions no longer exists New Section 960(c) not amended Provides for increase in FTC limitation in year of direct withholding tax and Section 960(b) taxes paid or deemed paid on PTI in year of repatriation Increase in limitation equal to excess limitation in the relevant separate category generated by the original income inclusion in the year of inclusion Provision is limited to PTI related to inclusions under Section 951(a). Does not apply to GILTI PTI New Section 960(b) Provides for indirect tax credit for taxes paid by a CFC to the extent a distribution is excluded from gross income of a United States shareholder under Section 959(a) A US shareholder is deemed to have paid foreign taxes that are properly attributable to the excluded distribution Page 28

29 Foreign tax credit changes Open items Application of look-through rules for interest, rents, royalties, GILTI and other gross-ups GILTI basket expense apportionment issues/separate limitation loss issues Section 960(a) properly attributable to meaning DREs of single CFC Nonconforming foreign tax year/us vs. foreign timing differences Indirect FTCs and Section 956 Section 960(b) attributable to PTI PTI distributed from DRE subject to withholding tax Section 965(g) FTC reduction application to withholding on PTI Administrative rules under revised 905(c) Page 29

30 Foreign tax credit changes Open items Section 78 gross-up required as dividend for all indirect credits even related to PTI distributions Definition of branch income Page 30

31 Section 59A: BEAT Page 31

32 Section 59A: BEAT Overview An applicable taxpayer for any taxable year must pay a tax equal to its base erosion minimum tax amount for the taxable year Effective date: Applies to base erosion payments paid or accrued in taxable years beginning after 31 December 2017 Applicable taxpayer means A corporation (other than a RIC, REIT or S corporation) That has average annual gross receipts of at least $500m for the three-year period ending with the preceding taxable year That has a base erosion percentage of 3% or higher (2% for banks and securities dealers) for that taxable year Special rule for foreign persons Aggregation rule Page 32

33 Section 59A: BEAT Definitions Base erosion minimum tax amount means the excess, if any of 10% (5% for taxable years beginning in 2018; 12.5% for taxable years beginning after 2025) of the modified taxable income; over The Section 26(b) regular tax liability reduced (not below zero) by the excess, if any, of Chapter 1 credits allowed against the Section 26(b) regular tax liability; over the sum of The credit allowed under Section 38 allocable to the research credit; plus The applicable Section 38 credits not exceeding 80% of the lesser of such credits or the base erosion minimum tax amount (determined without regard to such applicable Section 38 credits) Page 33

34 Section 59A: BEAT Definitions Modified taxable income means taxable income determined without regard to Any deduction (base erosion tax benefit) allowed for the taxable year with respect to any base erosion payment Or The base erosion percentage of any NOL allowed under Section 172 Base erosion percentage means The aggregate base erosion tax benefits; divided by The sum of the aggregate deductions allowed under Chapter 1, not including Deductions allowed under Sections 172, 245A or 250 Deductions for services to which the services cost exception from base erosion payments applies Deductions for qualified derivative payments which are not treated as base erosion payments Page 34

35 Section 59A: BEAT Definitions Base erosion payment means Any amount paid or accrued by the taxpayer to a related foreign person, and with respect to which a deduction is allowable (e.g., interest) Any amount paid or accrued to a related foreign person for the acquisition of depreciable/amortizable property Any premium paid or accrued to a related foreign person for certain reinsurance payments Any amount paid or accrued to a related surrogate foreign corporation (SFC) (only if the SFC first became a SFC after 9 November 2017) or a foreign member of the same expanded affiliated group (EAG) as the SFC that results in a reduction of the taxpayer s gross receipts Does not include: COGS (generally excluded unless paid to a SFC (that first became an SFC after 9 November 2017) or EAG member and reduces taxpayer s gross receipts) Any amount paid or accrued for services eligible for the services cost method under Section 482 Qualified derivative payments Amounts taxed under Sections 871/881 and withheld under Sections 1441/1442 Page 35

36 Section 59A: BEAT Example Regular tax calculation BEAT calculation Regular taxable income 1,000 Regular taxable income 1,000 Regular tax rate 20% Royalties <1,250> Regular tax bf credits 200 Modified taxable income 2,250 Tax credits (non-r&d) 0 BEAT rate 10% Regular tax liability 200 BEAT minimum tax 225 Additional tax liability from BEAT 25 Page 36

37 Section 59A: BEAT Example 2 Regular tax calculation BEAT calculation Regular taxable income 1,000 Regular taxable income 1,000 Regular tax rate 20% Payment to related foreign person for services (non-scm) <150> Regular tax bf credits 200 Modified taxable income 1,150 Tax credits (non-r&d) <100> BEAT rate 10% Regular tax liability 100 BEAT minimum tax 115 Additional tax liability from BEAT 15 Page 37

38 Section 59A: BEAT Open items Redetermination or add-back? Cost of services vs. cost of goods sold Exclusion for service cost method charges Application to consolidated returns Treatment of partnerships Application of base erosion percentage to NOLs Payments to US branch of a foreign related party Ability to net certain inflows and outflows Application to cost sharing payments Page 38

39 Section 163(j): interest limitation Page 39

40 Section 163(j): interest limitation Overview The amount allowed as a deduction for business interest for any taxable year shall not exceed the sum of: Business interest income 30% of adjusted taxable income (not less than zero) Floor plan financing interest Effective date: Applies to taxable years beginning after 31 December 2017 Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business (does not include investment interest) Trade or business excludes certain enumerated activities Applies to all business interest regardless of whether the payee is a related person Page 40

41 Section 163(j): Interest limitation Definitions Business interest income means interest includible in gross income that is properly allocable to a trade or business (does not include investment income) Floor plan financing interest means interest paid on indebtedness used to finance the acquisition of motor vehicles held for sale or lease and secured by the acquired inventory Adjusted taxable income (ATI) means taxable income Computed without regard to Any income, gain, deduction, loss not properly allocable to a trade or business Any business interest or business interest income Section 172 NOL deduction Section 199A pass-through deduction Any deduction allowable for depreciation, amortization or depletion (only for years beginning before 1 January 2022) Computed with any other adjustments as provided by regulations Page 41

42 Section 163(j): interest limitation Carryforwards Carryforward of disallowed business interest Any business interest not allowed as a deduction is treated as business interest paid or accrued in the succeeding taxable year No limitation on disallowed business interest carryforward period Section 381(c) amended to include carryover of disallowed business interest Section 382(d) amended to include carryover of disallowed business interest as a prechange loss Special rules for partnerships Page 42

43 Section 163(j): interest limitation Example Facts In 2018, XYZ Corp has $600 of taxable income from its trade or business, included in which is $100 of interest income and $400 of interest expense. XYZ Corp s Section 163(j) limitation is computed as follows: 30% of ATI: ATI is taxable income, computed without regard to interest expense or interest income. Therefore, ATI is $900 ($600 less the $100 of interest income, plus the $400 of interest expense) $900 * 30% = $270 Plus interest income $100 Section 163(j) limitation is $370 Therefore, XYZ Corp is entitled to deduct $370 of its $400 of interest expense, and the remaining $30 is carried forward. Page 43

44 Section 163(j): interest limitation Open Items Scope of trade or business include GILTI/Subpart F? Application to partnerships Application to foreign corporations Page 44

45 Section 267A: anti-hybrid rule Page 45

46 Section 267A: anti-hybrid rule Overview and definitions New Section 267A denies a deduction for any disqualified related-party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity Effective date: Applies to taxable years beginning after 31 December 2017 Disqualified related-party amount means Any interest or royalty paid or accrued to a related party to the extent that There is no corresponding inclusion to the related party under the tax law of the country where the related party is resident for tax purposes Or The related party is allowed a deduction with respect to the amount under the tax law of the residence country Hybrid transaction means Any transaction, series of transactions, agreement or instrument One or more payments with respect to which are treated as interest or royalties for federal income tax purposes Which are not so treated under the tax law of the residence country of the recipient (or the country where the recipient is subject to tax) Page 46

47 Section 267A: anti-hybrid rule Definitions Hybrid entity means Any entity that is either Treated as fiscally transparent for federal income tax purposes but is not so treated in the country where the entity is resident for tax purposes or is subject to tax Or Treated as fiscally transparent for purposes of the tax law of the country where the entity is resident for tax purposes or is subject to tax, but is not so treated for purposes of federal income tax Treasury has very broad authority to issue regulations or other guidance as may be necessary or appropriate to carry out the purpose of Section 267A Including the application of the provision to foreign and domestic branches and domestic entities, even if such branches or entities do not meet the statutory definition of a hybrid entity Page 47

48 Section 267A: anti-hybrid rule Open items Treatment of pre-2018 Section 163(j) disallowed interest carryforward Application to foreign corporations Subpart F exception Page 48

49 Other subpart F changes Page 49

50 Modification of stock attribution rules Section 958(b)(4) is repealed Effective date: Applies to the last taxable year of foreign corporations beginning before 1 January 2018 and for each subsequent taxable year Specified foreign corporation (SFC) means any controlled foreign corporation, and any foreign corporation with regard to which one or more domestic corporations is a US shareholder Deferred foreign income corporation means, with respect to any US shareholder, any SFC that has accumulated post-1986 deferred foreign income greater than zero Recall that deferred foreign income corporations are liable for transition tax Post-1986 deferred foreign income is generally defined with reference to post-1986 E&P, but only taking into account periods when the foreign corporation was a SFC Deemed corporate US shareholders (vis-à-vis downward attribution) are thus liable for Transition tax, but only with respect to the last taxable year of the foreign corporation beginning before 1 January 2018 (provided that prior to that, the foreign corporation was not a SFC) Subpart F inclusions (including new Subpart F amounts such as GILTI) on a going-forward basis Note that the definition of US shareholder includes US persons that own 10% or more of the total voting power or value of the stock in a foreign corporation, effective for the last taxable year of foreign corporations beginning after 31 December 2017 Page 50

51 Modification of stock attribution rules Example US1 FC1 10% 90% FC2 FC3 US2 As a result of downward attribution All the stock of FC3 that is owned by FC2 (100%) would be attributed to US2; FC3 would thus be a CFC US1 indirectly owns 10% of FC3 (through Section 958(a)(2)); thus US1 is a US shareholder of FC3 and has a Subpart F inclusion with respect to FC3 to the extent of its 10% indirect ownership Because the stock of FC3 that is owned by FC2 would be attributed to US2, US2 would be considered a US shareholder of FC3 but would not have a Subpart F inclusion because it does not own FC3 stock directly or indirectly Page 51

52 Other subpart F changes Elimination of the 30-day rule: A US shareholder is required to recognize a Subpart F inclusion under Section 951(a) with respect to a foreign corporation if the foreign corporation is a CFC at any time during the taxable year Under pre-tjca law, a US shareholder of a CFC was required to recognize a Subpart F inclusion under Section 951(a) with respect to a foreign corporation only if that foreign corporation was a CFC for at least 30 consecutive days during its tax year Eliminates Section 955 rules on previously excluded FBC shipping income Eliminates FBC Oil related income category of Subpart F income Section 954(c)(6) was not made permanent Currently Section 954(c)(6) scheduled to expire for taxable years of foreign corporations beginning on or after 1 January 2020 Page 52

53 Changes to the foreign tax credit regime Page 53

54 Agenda Review key changes to the foreign tax credit (FTC) provisions Efficient use of attributes in the new FTC world Page 54

55 The new FTC baskets Old rules Baskets New rules Baskets General limitation Section 904(d)(1)(B) General limitation Section 904(d)(1)(D) GILTI/951A Section 904(d)(1)(A) Passive Section 904(d)(1)(A) Passive Section 904(d)(1)(C) Foreign branch Section 904(d)(1)(B) Treaty baskets Section 904(d)(6) Treaty baskets Section 904(d)(6) Page 55

56 Determining the amount of the available FTC Direct foreign taxes Foreign taxes incurred directly by US taxpayers (foreign tax on branch income and withholding taxes) remain creditable under Section 901. Indirect foreign tax Section 902 is repealed effective for taxable years of foreign corporations beginning after 31 December 2017, and for taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. Section 960 as amended is the sole mechanism to claim indirect FTCs on foreign taxes paid by foreign corporations. Highlights: Indirect credits only available from CFCs. No FTC ever available from companies All US shareholders qualify for FTCs. Section 958(b) remains relevant for that determination. No direct ownership limitation No tier limitation on indirect credits Page 56

57 Changes to the deemed paid FTC rules Amended Section 960(a): For purposes of Subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under Section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation s foreign income taxes as are properly attributable to such item of income New Section 960(d): For purposes of Subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under Section 951A, such domestic corporation shall be deemed to have paid foreign income taxes equal to 80 percent of the product of (a) such domestic corporation s inclusion percentage, multiplied by (b) the aggregate tested income taxes paid or accrued by controlled foreign corporations New Section 960(b): Provides for indirect tax credit for taxes paid by a CFC to the extent a distribution is excluded from gross income of a United States shareholder under Section 959(a) A US shareholder is deemed to have paid foreign taxes that are properly attributable to the excluded distribution Page 57

58 Determining the amount of the available FTC Amended Section 78 Amount equal to the taxes deemed paid under Section 960(a), (b) and (d) (Subpart F and Section 956; PTI and GILTI, respectively) is treated as a dividend received. The 80 percent limitation on GILTI taxes under Section 960(d) is ignored for this purpose income inclusion equals 100% of GILTI taxes Inclusion is not treated as a dividend for purposes of Sections 245A and 245 Section 960(b) redesignated as Section 960(c) Prior Section 960(c) repealed. Anti-hopscotching rule for Section 956 inclusions no longer exists New Section 960(c) not amended Provides for increase in FTC limitation in year of direct withholding tax and Section 960(b) taxes paid or deemed paid on PTI in year of repatriation Increase in limitation equal to excess limitation in the relevant separate category generated by the original income inclusion in the year of inclusion Provision is limited to PTI related to inclusions under Section 951(a). Does not apply to GILTI PTI Page 58

59 Determining the amount of the available FTC Section 245A Disallows FTCs (withholding tax) for dividends for which a deduction is allowed Disallows Section 960 credits on lower-tier CFC hybrid dividends treated as Subpart F income Amendments to Section 905(c) Foreign tax credit pooling adjustment for foreign tax redeterminations is deleted for taxable years beginning after 31 December 2017 The relation back doctrine will apply to redeterminations of indirect foreign tax credits as it historically has to direct foreign tax credit redeterminations Requires redeterminations (amended US income tax returns) for all foreign income tax adjustments agreed in all tax years beginning after 31 December 2017! Page 59

60 Expense apportionment No change in general expense apportionment rules of Section 861 requiring expenses be apportioned to categories of income Fungibility concept for interest expense on asset method Apportioned based on income the asset generates, has generated or is reasonably expected to generate Research and development expense apportioned based on gross income or gross sales Other expenses based on factual relationship Fair market value interest expense apportionment method repealed effective for tax years beginning after 31 December 2017 Page 60

61 Expense apportionment New Section 904(b)(5) Provides that foreign source income under Section 904(a) is determined without regard to The foreign source portion of any dividend received from a foreign corporation Deductions properly allocated to Income with respect to stock other than amounts includible under Section 951(a)(1) or 951A(a) Or Such stock to the extent income with respect to such stock is other than amounts includible under Section 951(a)(1) or 951A(a) Page 61

62 Efficient use of attributes in the new FTC world GILTI basket planning: post-tax reform FTC strategy begins with the GILTI basket FTC position General limitation basket planning strategy Branch basket planning Expense apportionment planning Page 62

63 Post-tax reform FTC planning I. GILTI basket planning: post-tax reform FTC strategy begins with the GILTI basket FTC position Excess GILTI limitation taxpayer strategic objectives: Maximize GILTI inclusion from entities with effective foreign tax rates between % and 52.5% Specifically allocated tested losses to low-tax tested income Specifically allocate QBAI to low-tax tested income with deconsolidated US shareholder (partnership) Migrate branch basket taxes to GILTI through CTB/Section 367(d) Page 63

64 GILTI planning (excess limitation): Specific allocation of tested losses Tested income: 100 Tested loss: <100> Low-tax CFC Tested-loss CFC Deemed liquidation USP High-tax CFC Tested income: 100 FT: 30 Objective: Specifically allocate tested losses to low-tax tested income Facts: Tested-loss CFC elects to be treated as a disregarded entity of Low-tax CFC Anticipated results and considerations: Combines $100 tested loss with Low-tax CFC s $100 tested income, causing USP s $100 GILTI (with a $24 deemed paid credit) Without the combination of the Low-tax CFC and the Tested-loss CFC, USP would still have a $100 GILTI inclusion, but $50 of the inclusion would be from the Low-tax CFC (with no deemed paid credits) and $50 from the High-tax CFC (with a $12 deemed paid credit) Page 64

65 Post-tax reform FTC planning I. GILTI basket planning: post-tax reform FTC strategy begins with the GILTI basket FTC position Excess GILTI credit taxpayer strategic objectives: Convert GILTI into general limitation Subpart F income and/or foreign branch income FBCSI/FBCSvI planning Tested-loss segregation Tested-loss generation UK treaty basket Convert GILTI basket high tax to branch basket by CTB Minimizing expense apportionment more critical than in other baskets Page 65

66 Post-tax reform FTC planning I. GILTI basket planning: post-tax reform FTC strategy begins with the GILTI basket FTC position Excess GILTI credit taxpayer strategic objectives (continued): Reduce local country taxes, including withholding tax Maximize US outbound cross-charges Migrate functions, assets and/or risks from CFCs to US for FDII Page 66

67 GILTI planning (excess credit): Converting GILTI into Subpart F income Objective: Convert GILTI into general limitation Subpart F income (e.g., foreign base company (FBC) sales income) USP Facts: UK LRD is a limited risk distributor to UK customers As a CFC, UK LRD s net sales income to UK customers is excluded from FBC sales income because of the same country exception and therefore would not be taken into account in determining UK LRD s Subpart F income CFC1 (NL) CFC2 (FR) As a result, UK LRD s net sales income would be part of its tested income and would be part of USP s GILTI inclusion Anticipated results: DRE election for UK LRD UK LRD Property sale If UK LRD were treated as a disregarded entity, the net sales income from UK customers would constitute FBC sales income of CFC1, which is organized in The Netherlands As a result, the net sales income from the UK customers would be part of CFC1 s Subpart F income and excluded from CFC1 s tested income for GILTI purposes The same opportunity exists with services income Additional considerations: Sale to UK customer Local country tax implications of moving entities into the structure (if necessary) or of creating a hybrid entity Blending ETR for Subpart F income purposes target 21% or higher if GL excess limit (can elect HTE at 18.9%) Section 987 consequences Page 67

68 GILTI planning (excess credit): Segregating tested losses Objective: USP Segregate Tested-loss CFC with High-tax CFC to eliminate GILTI inclusion with respect to Hightax CFC Facts: Assumes GILTI determined on a separate US shareholder basis Anticipated results: US1 Sec. 956 investment US2 US1 does not have a GILTI inclusion with respect to High-tax CFC because US1 does not have net CFC tested income with respect to its CFCs Testedloss CFC High-tax CFC Low-tax CFC Section 956 inclusion may access the foreign taxes of High-tax CFC as general limitation category taxes (see Treas. Reg (c)(4)(i)) Additional considerations: Flexibility to repatriate deferred income of High-tax CFC under Section 245A if ultimately limited in capacity to credit Tested loss: <100> Tested income: 100 Foreign tax: 30 Tested income: 100 If all three CFCs held together, US1 would recognize a GILTI inclusion of 50 with respect to High-tax CFC and 12 (80% x 15) of foreign tax would be GILTI limitation category taxes (possibly stranding the remaining 3 of foreign tax if deemed only to be properly attributable under Section 960(d) to such GILTI inclusion amount) Page 68

69 GILTI planning (excess credit): Segregating tested loss/qbai Objective: USP Segregate Tested-loss CFC with High-tax CFC to eliminate GILTI inclusion with respect to Hightax CFC Facts: US1 Sec. 956 investment US PRS If GILTI determined on a consolidated group basis, consider using a domestic partnership to hold Low-tax CFC Anticipated results: US1 does not recognize a GILTI inclusion with respect to High-tax CFC because US1 does not have any net CFC tested income Testedloss CFC High-tax CFC Low-tax CFC Section 956 may be utilized to access the 30 of foreign tax of High-tax CFC as general limitation category taxes (see Treas. Reg (c)(4)(i)) USP has a 100 GILTI inclusion with respect to Low-tax CFC Additional considerations: Tested loss: <100> Tested income: 100 Foreign tax: 30 Tested income: 100 Flexibility to repatriate deferred income of High-tax CFC under Section 245A if ultimately limited in capacity to credit If all three CFCs held together, US1 would recognize a GILTI inclusion of 50 with respect to High-tax CFC and 12 (80% x 15) of foreign tax would be GILTI limitation category taxes (possibly stranding the remaining 3 of foreign tax if deemed only to be properly attributable under Section 960(d) to such GILTI inclusion amount) Page 69

70 GILTI planning (excess credit): Generating tested losses Objective: CFC Holdco s tested loss proportionately offsets the tested income of other CFCs The resulting deferred income can be distributed tax-free under 245A or included via a Section 956 amount, along with any underlying credits USP Facts: CFC Opcos have tested income and pay foreign taxes USP forms CFC Holdco, which pays interest to CFC Finco Tested loss = $50 Tested income = $100 CFC Holdco CFC Opcos $50 interest CFC Finco Tested income = $50 CFC Opcos holds US property with an adjusted basis in excess of its PTI amount Anticipated results: CFC Holdco s tested loss proportionately offsets the tested income of CFC Opcos and CFC Finco, but GILTI inclusion remains at $100 Deferred income and associated taxes of CFC Opcos can be distributed tax-free via 245A and expenses allocated against such income under will increase the FTC limit in GILTI and general limitation Or, to the extent of a 956 inclusion, the deferred income will be includible to USP under 956 as general limitation income and will bring up the properly attributable foreign taxes; reduces excess FTCs in GILTI basket and moves to general limitation Additional considerations: Assumes 163(j) does not apply to limit CFC Holdco interest deduction Page 70

71 GILTI planning (excess limitation): Convert GILTI to branch basket Objective: USP Facts: Convert GILTI credits to foreign branch credits CFC s income which is not Subpart F income (and not otherwise excluded) will be tested income, and the properly attributable taxes will be GILTI foreign tax credits FDRE s net income will be foreign branch income, and the associated foreign income taxes will be in the foreign branch income basket and eligible to be carried back/forward under Section 904(c) CFC vs. FDRE Considerations: Consider low-appreciation components of the business, e.g., contract manufacturers Consider segregating low appreciation business from other assets in CFC Page 71

72 GILTI planning (excess limitation): Convert GILTI to FDII Royalty payment USP Service charge-out Objective: Facts: Increase deductible expenses in foreign jurisdiction to reduce local country tax, decrease GILTI and increase FDII USP holds worldwide IP rights USP provides HQ and overhead type services to its affiliates; suggested review of HQ and overhead services being provided by USP to determine if all applicable services are being accounted for and charged out CFC1 vs. CFC2 Anticipated results: Deductible payments from CFC1 and CFC2 will be allocated against tested income and thus decrease USP s GILTI inclusion USP s income earned on these charge-outs may constitute FDII Increased local country deductions lowering foreign tax expense Such charges often have reduced WHT compared to dividends Additional considerations: Local country deductibility should be considered With the FDII rate at %, there is a tax rate arbitrage opportunity to increasing deductible charges to many higher taxed jurisdictions Evaluate any prior year exposure from a US perspective Page 72

73 Post-tax reform FTC planning II. General limitation basket planning strategy Credits Position high-tax deferred income to repatriate via Section 956 Consider accelerating foreign taxes on Subpart F and deferred income subject to Section 956 in 2018 and 2019 to create carryback to transition year excess limitation Foreign source income Leveraged partnership planning Migration of income into US for FDII benefits Opportunities in North America and LATAM Global principal functions Consider IP domestication Page 73

74 Post-tax reform FTC planning II. General limitation basket planning strategy Foreign source income CTB on CFC producing product for US market for Section 863(b) sourcing on US income Section 367(d) amount from CTB on first-tier DREs Migrate income from branch basket to GL (and high tax into GILTI) Page 74

75 General limitation basket planning: Leveraged partnership Objective: USP Generate additional foreign source income without incremental US federal income tax Facts: Note USP holds notes issued by FDRE and FP Anticipated results: Note USS Interest income recognized by USP on the notes will be foreign source Interest expense allocated to USP and USS from FP subject to interest expense apportionment using asset method The interest paid by FDRE will decrease its foreign income tax FP Additional considerations: Entering structure without gain 904(d) basket for interest income (GILTI vs. general limitation) Section 987 implications FDRE CFC Foreign WHT Confirm deduction in FDRE Creditor Debtor Page 75

76 Foreign-derived intangible income (FDII) overlay with general limitation FTC limitation US taxable income type FDII qualification General limitation basket US manufacturing Export X Without planning US manufacturing Domestic X X Foreign manufacturing Export Assuming not QBU Foreign manufacturing Domestic Services US for export X Services Foreign for foreign Assuming not QBU Royalties/Leases Non US Depending on look-through US Principal (for non US market) Non US procurement Buy/sell export principal Export services Loans to CFCs Maybe Depending on look-through Subpart F (e.g., foreign base company sales and services) X Page 76

77 Post-tax reform FTC planning III. Branch basket planning Credits: Branch basket activity generally result of legacy structure or other planning (BEAT, FSI, Section 163(j)) CTB on high-tax entities in excess limitation branch Reduce foreign tax in branch basket with disregarded leverage and other charges Foreign source income Foreign engineering/r&d centers providing services for CFCs converted to DREs US partnership owner of foreign engineering/r&d center DREs with US reimbursement Consider migration of IP and finance income into QBU Page 77

78 Branch basket planning: Transfer IP to a QBU CFC USP Royalty payment FP Foreign IP Objective: Facts: Convert general limitation income to foreign branch income Foreign IP rights are transferred to FP FP s net royalty will be foreign branch income and the associated foreign income taxes will be foreign branch taxes Anticipated results: Royalty income would shift from the general limitation category to the foreign branch limitation category Additional considerations: Deductibility and foreign WHT rate on payments to FP Ability to claim excess foreign branch income foreign tax credits before they expire Amount of substance required in FP to qualify as a branch for purpose of the branch basket These recommendations would sacrifice some FDII, so modelling should be conducted to determine the ultimate benefit Section 987 considerations Page 78

79 Expense apportionment Objective: Minimize expenses allocated or apportioned against GILTI All expenses: Consider proper application of Section 904(b)(5) to allocate and apportion deductions away from GILTI basket and other excess credit baskets (e.g., by characterizing assets as tax-exempt, a portion of the interest expense deduction could be disregarded for purposes of computing the FTC limitation) Reassess historic allocation and apportionment methods to determine whether they still appropriately reflect the factual relationship among the categories of income SG&A/Stewardship: Detailed headquarters study to identify overhead expenses at US headquarters that can be allocated/apportioned to US source income/excess limitation baskets and away from the GILTI, passive and branch baskets Increase charge-outs to high-tax jurisdictions in order to increase local tax deductions and reduce expense apportionment at the US level Analyze stewardship expenses in conjunction with transfer pricing review to eliminate overstatement of stewardship Consider planning opportunities with regard to the allocation and apportionment of stewardship expenses (e.g., stewardship expenses are generally allocable to dividends received under Treas. Reg (e)(4)(ii) and thus potentially allocable largely to tax-exempt dividend income) R&D expense: Consider methodologies limiting sales allocable to the GILTI basket for purposes of apportioning R&D expenses Considerations: Consider different approaches for the characterization of assets given the new types of income created by tax reform (e.g., GILTI and Section 904(b)(5)) Page 79

80 Questions? Page 80

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