Basics of International Tax Planning with Tax Reform

Transcription

1 Basics of International Tax Planning with Tax Reform Layla Asali & Andy Howlett TEI Houston Tax School 2018 February 28, 2018

2 Agenda U.S. International Tax System Overview Deemed Repatriation Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) Participation Exemption Foreign Branches Base Erosion and Anti-Abuse Tax (BEAT) Other International Tax Provisions of the 2017 Act Miller & Chevalier Chartered 2

3 U.S. INTERNATIONAL TAX REFORM OVERVIEW

4 Pre-2018 U.S. International Tax System Worldwide system plus deferral All foreign income of U.S. persons subject to U.S. tax U.S. tax on active foreign income earned by controlled foreign corporations (CFCs) deferred until repatriation Passive or certain mobile income subject to current tax under subpart F rules Double taxation relieved through complex foreign tax credit mechanism Incentives for foreign sales provided through foreign tax credit system Problems with pre-2018 system Relatively high U.S. rate encouraged income shifting to CFCs IRS unable to enforce transfer pricing rules CFC rules increasingly ineffective Lock-out effect repatriation tax encouraged accumulation of earnings offshore Worldwide system out of step with territorial system of major trading partners and encouraged inversions Miller & Chevalier Chartered 4

5 New U.S. International Tax System Lower corporate tax rate (35% 21%) Territorial system with minimum tax on low-tax foreign intangible income Or, worldwide system with exemption for returns to tangible income Foreign branches subject to subject to tax at the 21% rate, with new limits on foreign tax credits and outbound transfers Traditional subpart F rules (including section 956) are unchanged, now subject to tax at the 21% rate Global intangible low-taxed income (GILTI) regime taxes other CFC earnings Excludes 10% deemed annual return on the tax basis of tangible assets Generally, subject to U.S. tax at 50% of the U.S. corporate tax rate (10.5%) Foreign tax credits permitted on a more limited basis Foreign-derived intangible income (FDII) deduction for income of U.S. companies from foreign sales, licenses, leases, and services Base erosion anti-abuse tax (BEAT) targets certain payments to foreign related persons Miller & Chevalier Chartered 5

6 New U.S. International Tax System Base Erosion surtax 10% rate on taxable income plus base erosion payments by U.S. companies, to the extent liability exceeds regular tax liability Full 21% tax Routine returns of U.S. companies on tangible property Excess returns of U.S. companies from U.S. market Foreign branch income (and losses) of U.S. companies (FTC, single basket) Gain on sales of CFC stock Subpart F income / investments in U.S. property (FTC) Lower rate of tax Excess returns of U.S. companies from foreign markets (FDII) (FTC if foreign source income) Excess returns of CFCs (GILTI) (FTC, single basket) Exempt income Actual or deemed distributions from CFCs Routine returns of CFCs on tangible property Miller & Chevalier Chartered 6

7 DEEMED REPATRIATION

8 Repatriation Basic Mechanics Section 965(a) requires that in the last taxable year of a deferred foreign income corporation ( DFIC ) that begins before January 1, 2018 (the inclusion year ), the subpart F income of the corporation is increased by the greater of: The corporation s accumulated post-1986 deferred foreign income as of November 2, 2017, or The corporation s accumulated post-1986 deferred foreign income as of December 31, 2017 (measurement dates) Result: the U.S. Shareholder of the DFIC includes in its gross income its pro rata share of the additional subpart F income of the DFIC Miller & Chevalier Chartered 8

9 Definitions Specified foreign corporation (SFC) ( 965(e)) Any CFC, and Any foreign corporation with respect to which one or more domestic corporations is a U.S. Shareholder (10% ownership) But does not include a PFIC that is not also a CFC Deferred foreign income corporation (DFIC) ( 965(d)) Specified foreign corporation that has accumulated post-1986 deferred foreign income, as of the relevant measurement date, greater than zero Accumulated post-1986 deferred foreign income is post-1986 E&P, other than U.S. effectively connected income or previously taxed income Post-1986 E&P takes into account only periods in which the foreign corporation was a specified foreign corporation, and is not reduced by dividends distributed during the inclusion year, unless the dividends were distributed to another specified foreign corporation. IRS Notice indicates that E&P on November 2, 2017 measurement date is determined based on closing of the books on November 2, or on October 31 plus 2 days of annualized E&P E&P deficit foreign corporation ( 965(b)) Specified foreign corporation with deficit in post-1986 E&P as of November 2, 2017 Miller & Chevalier Chartered 9

10 Inclusion Amount U.S. Shareholder includes in gross income its pro rata share of each DFIC s accumulated post-1986 deferred foreign income U.S. Shareholder may reduce the amount of this income inclusion (not below zero) by: its pro rata share of the E&P deficit of each E&P deficit foreign corporation, and its share of the unused E&P deficit of other U.S. Shareholders in the same affiliated group IRS Notice indicates that Treasury and the IRS intend to issue regulations treating consolidated group members as a single U.S. Shareholder for purposes of calculating the income inclusion See 965(b) Treasury has authority under 965(o) to issue regulations to prevent avoidance, including through a reduction in earnings and profits, through entity classification elections or accounting methods, or otherwise Rev. Proc announced restriction on changes in taxable year in 2017 for specified foreign corporations subject to section 965 Miller & Chevalier Chartered 10

11 Tax Rates Amounts included in a U.S. Shareholder s gross income are taxed at 8% for non-cash assets, and 15.5% for cash assets The rule is not a pro rata allocation of E&P between cash and non-cash assets The income inclusion pulls out cash first If cash > income inclusion, then the tax rate equals 15.5% Rate equivalent percentages are calculated so that the amount of the income inclusion is subject to tax at 8% or 15.5%, taking into account only the deduction and the highest corporate tax rate Miller & Chevalier Chartered 11

12 Tax Rates A U.S. Shareholder s aggregate foreign cash position is the greater of the aggregate of the shareholder s pro rata share of the cash position of each specified foreign corporation of such shareholder, determined as of the end of the last taxable year of such specified foreign corporation which begins before January 1, 2018, or the average of the aggregate determined as of the close of the last two taxable years of each specified foreign corporation ending before November 2, 2017 For a specified foreign corporation with December 31 fiscal year end, the relevant dates are December 31 of 2017, 2016, and 2015 Note that a specified foreign corporation may have a different year end than the U.S. Shareholder Miller & Chevalier Chartered 12

13 Tax Rates Cash position is defined in 965(c)(3)(B) as: Cash Net accounts receivable Potentially broad scope of the term accounts receivable Fair market value of actively traded property, commercial paper, government securities, foreign currency, short-term obligations, and, by regulation, economically equivalent assets Treasury has authority to: Add to the list of cash assets Determine that cash position of a specified foreign corporation is taken into account with respect to another specified foreign corporation, and allow for avoidance of double counting Issue anti-abuse rules Miller & Chevalier Chartered 13

14 Foreign Tax Credits, NOLs, and ODLs A U.S. Shareholder may claim a reduced U.S. foreign tax credit for foreign taxes paid by CFCs subject to deemed repatriation For any amount for which a participation exemption/deduction is available, a percentage of foreign tax credits are disallowed (equal to the sum of 77.1% for cash, plus 55.7% for non-cash E&P) Any taxes for which a credit is disallowed is also not deductible Section 78 gross-up is likewise reduced Foreign tax credit carryovers and NOLs from prior years may be used to offset tax liability associated with deemed repatriation Foreign tax credit for withholding tax when amounts subject to deemed repatriation are distributed Reduction of foreign tax credit under section 965(g) to reflect participation exemption? FTC limitation may be increased in future years under section 960(c) Election not to use NOLs is provided in 965(n) NOL carryovers v. NOL incurred in transition year? Election to increase recapture percentage under 904(g) for any pre-2018 unused overall domestic loss ( ODL ) through 2027 Miller & Chevalier Chartered 14

15 Payment of Tax Liability A U.S. Shareholder may elect to pay the net tax liability in eight annual backloaded installments The election must be made by the due date of the tax return for the inclusion year The first installment is due on the due date of the tax return for the inclusion year, determined without regard to filing extensions Miller & Chevalier Chartered 15

16 Key Issues Numerous technical gaps and ambiguities awaiting guidance Extent to which Treasury will exercise its anti-abuse authority Guidance to date seems limited to 2017 planning Extent to which government will develop simplifying conventions Given amounts at stake, controversy is likely Miller & Chevalier Chartered 16

17 GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI) AND FOREIGN-DERIVED INTANGIBLE INCOME (FDII)

18 GILTI Sections 951A and 250 U.S. Shareholders of CFCs are subject to current U.S. taxation on global low-taxed intangible income ( GILTI ) Domestic corporations may deduct 50% of GILTI (37.5% after 2025) Result is 10.5% tax rate on GILTI (through 2025) GILTI deductions are not allowed in excess of current year taxable income (no carryover of disallowed deductions) Applicable for tax years beginning after December 31, 2017 Note Traditional subpart F rules for foreign base company income generally remain in effect (foreign base company oil related income category eliminated) Miller & Chevalier Chartered 18

19 GILTI High-Level Calculation What is amount of GILTI inclusion? CFC Net Tested Income (aggregate basis taking into account all CFCs of a U.S. shareholder), less Net Deemed Tangible Income Return What is Net Deemed Tangible Income Return? Qualified Business Asset Investment ( QBAI ) x 10%, less CFC interest expense What is QBAI? Quarterly average basis of tangible property used in the production of tested income Property must be used in a trade or business and depreciable under section 167 Basis determined under section 168(g) What is Tested Income? CFC gross income, other than U.S. effectively connected income Subpart F income (or income excluded from subpart F because it is highly taxed) Dividends from related corporations Foreign oil and gas extraction income as defined in section 907(c)(1), less Allocable deductions and taxes Miller & Chevalier Chartered 19

20 GILTI Calculation at U.S. Shareholder Level Calculation of GILTI is done at U.S. Shareholder level Net CFC Tested Income: U.S. Shareholder s pro rata share of tested income minus tested losses from all CFCs Net Deemed Tangible Income Return: 10% return on U.S. Shareholder s pro rata share of QBAI, reduced by interest expense No QBAI from tested loss CFCs U.S. Shareholder level calculation v. U.S. consolidated group Sharing of CFC losses within U.S. consolidated group? Sharing of QBAI within U.S. consolidated group? Miller & Chevalier Chartered 20

21 GILTI U.S. Foreign Tax Credit U.S. Shareholder is entitled to a foreign tax credit equal to 80% of foreign taxes attributable to GILTI income 80% x foreign taxes attributable to tested income x inclusion percentage Inclusion percentage is the U.S. Shareholder s GILTI / aggregate tested income Allowance of 80% credit for foreign tax attributable to GILTI apparently intended to result in no U.S. residual tax where foreign tax rate is % (16.406% after 2025), but this result may be difficult to achieve due to limitations on U.S. foreign tax credit Apportionment of expenses (e.g., interest expense and R&D) to GILTI Section 904 foreign source income limitation Separate GILTI basket or limitation No carryover of GILTI taxes Section 78 gross-up not subject to 80% haircut Foreign taxes of tested loss CFCs are not included Special rules applicable to withholding taxes paid on distributions of GILTI PTI Miller & Chevalier Chartered 21

22 FDII Section 250 ( ) Foreign derived deduction eligible income FDII = Deemed intangible income Deduction eligible income Domestic corporations may deduct 37.5% of FDII (21.875% after 2025) Result is % tax rate on FDII (through 2025) Deemed intangible income Deduction eligible income minus 10% of QBAI Foreign-derived deduction eligible income Income derived in connection with Property sold, leased, or licensed to non-u.s. person for foreign use, or Services provided to any person, or with respect to property, not located within the United States Deduction eligible income Gross income, other than Subpart F GILTI Financial services income Dividends received from CFCs Domestic oil and gas extraction income (defined by reference to section 907(c)(1)) Foreign branch income, less Allocable deductions FDII deduction is not allowed in excess of current year taxable income Miller & Chevalier Chartered 22

23 Observations Upstream oil and gas operations largely outside of GILTI and FDII regimes Rules heighten importance of allocation of income between extraction operations and other operations For income within the GILTI regime, foreign tax credit limitations can result in significant residual U.S. tax even where effective foreign tax rate is relatively high Miller & Chevalier Chartered 23

24 PARTICIPATION EXEMPTION SYSTEM

25 Participation Exemption Section 245A Section 245A provides a 100% dividends-received deduction for the foreign-source portion of a dividend received by a corporate U.S. shareholder from a specified 10-percent owned foreign corporation No foreign tax credits are allowed with respect to amounts eligible for a deduction under section 245A Section 902 is repealed Gains from the sale of shares not eligible for participation exemption (other than amounts treated as a dividend under section 1248) Losses are taken into account as well Hybrid dividends not eligible for participation exemption Section 956 remains in effect, not subject to participation exemption Potentially results in a full inclusion with respect to a CFC s investment in U.S. property, as well as an unreduced FTC under section 960 Miller & Chevalier Chartered 25

26 FOREIGN BRANCHES

27 Foreign Branches In General Foreign branch income subject to full U.S. taxation Separate section 904 FTC basket for foreign branch income Foreign branch income not eligible for FDII deduction Compare to taxation of CFCs with section 956 investments in U.S. property New rules for outbound transfer of branch assets U.S. source income inclusion for transferred loss amount upon incorporation of foreign branches Repeal of section 367(a) active trade or business exception Addition of goodwill, going concern value, and workforce in place to list of section 936(h)(2)(B) intangibles Subjects these items to super-royalty regime of section 367(d) Miller & Chevalier Chartered 27

28 Foreign Branch Losses Section 91 Section 91 requires an income inclusion when a domestic corporation transfers substantially all of the assets of a foreign branch to a specified 10-percent owned foreign corporation with respect to which the domestic corporation is a United States shareholder after the transfer The amount of the inclusion equals the transferred loss amount, and is treated as U.S.-source Treasury has authority to issue regulations providing for proper basis adjustments Miller & Chevalier Chartered 28

29 Foreign Branch Losses Transferred loss amount equals the excess (if any) of the sum of the losses of the foreign branch, over the sum of taxable income of the foreign branch and overall foreign losses recaptured under section 904(f)(3) from the disposition of assets in the transfer. For these purposes: Losses taken into account are those incurred after December 31, 2017 and before the transfer, and with respect to which a deduction was allowed. Taxable income taken into account is the taxable income in years after the taxable year in which the loss was incurred, and through the close of the taxable year of the transfer. The transferred loss amount may be reduced by gain otherwise recognized on the transfer Consider DCL recapture, section 367(d) inclusions Miller & Chevalier Chartered 29

30 BASE EROSION AND ANTI-ABUSE TAX (BEAT)

31 BEAT Overview Section 59A The BEAT is a new minimum tax that targets related-party payments The base erosion minimum tax is the excess of: 10% (5% in 2018) of the modified taxable income of the taxpayer for the taxable year, over The regular tax liability of the taxpayer reduced (through 2025) by certain credits, including FTCs but not R&D credit or up to 80% of applicable section 38 credits Rate increased by 1% for affiliated groups with a bank or registered securities dealer Rate increases to 12.5% after 2025 Miller & Chevalier Chartered 31

32 BEAT Overview Section 59A Modified taxable income is taxable income without regard to any base erosion tax benefit or the base erosion percentage of any NOL deduction for the taxable year Applicable taxpayer Corporation other than a RIC, REIT or S corporation Average annual gross receipts for the prior three years of at least $500 million Base erosion percentage is 3% or higher (or 2% for affiliated groups which include a bank or registered securities dealer) Miller & Chevalier Chartered 32

33 Base Erosion Payments A base erosion payment means: Deductible amounts paid or accrued by a taxpayer to a foreign related person Amounts paid or accrued to a foreign related person in connection with the acquisition of depreciable (or amortizable) property Reinsurance payments to foreign related persons Amounts paid or accrued to a surrogate foreign corporation which result in a reduction of gross receipts of the taxpayer (i.e., applies to inversion transactions after November 9, 2017) Base erosion payments do not include: Cost of goods sold Certain services Services meet the requirements for eligibility for use of the services cost method under section 482, determined without regard to the requirement that services not contribute significantly to fundamental risks of the business Amount of payment constitutes total services costs with no markup component Qualified derivative payments Miller & Chevalier Chartered 33

34 Base Erosion Tax Benefit and Base Erosion Percentage Base erosion tax benefit any deduction with respect to a base erosion payment Amounts taxed under section 881 (FDAP) are excluded in proportion to the rate of tax applied to reduce the 30% statutory rate depreciation or amortization deductions with respect to a base erosion payment for the purchase of property any reduction in gross receipts resulting from a payment to a surrogate foreign corporation or its foreign affiliates Base erosion percentage Percentage determined by dividing Aggregate amount of base erosion tax benefits, by Aggregate amount of all deductions for the taxable year Not taking into account deductions under section 172 (NOLs), section 245A (dividends received), section 250 (FDII/GILTI), or amounts that qualify for exceptions for services or qualified derivative payments Miller & Chevalier Chartered 34

35 Regulatory Authority and Information Reporting Section 59A(i)(1) grants Treasury authority to issue regulations providing for adjustments to the application of the BEAT to prevent the avoidance of the purposes of this section, including through : The use of unrelated persons, conduit transactions, or other intermediaries, or Transactions or arrangements designed, in whole or in part to characterize payments otherwise subject to this section as payments not subject to this section, or to substitute payments not subject to this section for payments otherwise subject to this section Information reporting required under section 6038A Miller & Chevalier Chartered 35

36 BEAT Observations Numerous technical gaps and ambiguities awaiting guidance Services cost method exception Cost sharing NOLs Extent to which Treasury will exercise its anti-abuse authority Deductible payments v. cost of goods sold Importance of tax accounting BEAT produces harsh results for applicable taxpayers with losses or material foreign tax credits Miller & Chevalier Chartered 36

37 OTHER INTERNATIONAL PROVISIONS OF 2017 ACT

38 Other Items CFC stock attribution ( 958(b)) Repeal of foreign base company oil related income ( FBCORI ) rules ( 954) Anti-hybrid rules ( 267A) Sale of an interest in a partnership engaged in a US trade or business ( 864(c)) Valuation of intangible property ( 367, 482, and 936) Source of income from inventory sales ( 863(b)) Repeal of FMV method for interest expense apportionment ( 864) Restriction on insurance exception to PFIC rules ( 1297) Miller & Chevalier Chartered 38

39 Questions? Layla J. Asali (202) Andy L. Howlett (202) Miller & Chevalier Chartered 39