Section 987. May 16, 2017

Transcription

1 Section 987 May 16, 2017

2 About this presentation This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or. services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation. 2

3 Speakers Steve Jensen, Senior Counsel, International, Office of Chief Counsel, IRS Jeff Dorfman, Managing Director, PwC, Washington D.C. Mike Mou, Principal, International Tax, Deloitte Tax LLP Lee Holt, Partner, Capital Markets - International Tax, EY LLP, New York Howard Wiener, Principal, International Tax, Washington National Tax, KPMG LLP 3

4 Agenda Section 987 Background Overview of Final and Temporary Section 987 Regulations Scope Attribution Rules Computation of QBU Net Income/Loss Computation of Section 987 Gain/Loss Character and Source Partnerships QBU Terminations Elections and Record Keeping Requirements Deferral Events, Transition Rules and Effective Date ASC 740 Section 988 Loss Deferral Appendix 4

5 Section 987 Background 5

6 Section 987 A taxpayer having one or more QBUs with a functional currency other than the US dollar shall determine its taxable income by Computing taxable income for each QBU in its functional currency, Translating the income or loss of the QBU into the taxpayer s functional currency at the appropriate exchange rate, and Making proper adjustments as set forth in regulations to account for transfers of property between QBUs of the taxpayer.... The legislative history provides that exchange gain or loss was intended to be recognized to the extent the value of the currency at the time of the remittance differs from the value when earned 6

7 Section 987(1) Compute Income in Functional Currency 7

8 Section 987(2) Translate Earnings at the Appropriate Exchange Rate 8

9 Section 987(3) Proper Adjustments to Account for Remittances AUD1:$1.2 9

10 Section 987: How Did We Get Here? Congress enacts 987 Proposed Regulations issued applying P&L method Notice Proposed regulations issued introducing Foreign Exchange Exposure Method Final Regulations issued on 12/7/16: modified Foreign Exchange Exposure Method 10

11 Overview of Final and Temporary Section 987 Regulations 11

12 Grouping elections available Scope Under Treas. Reg The Regulations apply to the following: Individual and corporate owners of Section 987 QBUs Aggregate partnerships (all partners are related under Sections 267(b) or 707(b)) The Regulations do not apply to the following: Specified financial entities (i.e., banks, insurance companies, leasing companies, finance coordination centers, regulated investment companies, or real estate investment trusts) Unless in-house bank or internal treasury center Trusts, estates, S corporations Non-aggregate partnerships Treated as a QBU Must use a reasonable method to comply with Section

13 Scope Under Treas. Reg (cont d) Non-functional currency items of a US-dollar QBU owned by a CFC are treated as reflected directly on the books of the CFC owner unless an election is made to apply section 987 to the US-dollar QBU Grouping elections available Grouping elections available 13

14 Attribution Under Treas. Reg Items are attributed to a 987 QBU to the extent they are reflected on its separate books and records Exceptions: Non-portfolio stock Partnership interests Certain acquisition indebtedness Items included/excluded from the QBU s books and records with a principal purpose of avoiding taxation under Section 987 Consistent with flat approach 14

15 Branch Taxable Income Under Treas. Reg Translate income, deduction, gain or loss into owner s functional currency at the yearly average exchange rate Spot rate election available Translate basis of historic assets, depreciation, and amortization using historic exchange rate (i.e., generally the yearly average exchange rate) Special rules for translation of costs of goods sold Average translation election may be made for all items in conjunction with annual deemed termination election 15

16 Theory of Treas. Reg Balance sheet approach, using special translation convention, to limit section 987 gain/loss to the change in net worth of a QBU attributable to currency fluctuations Financial assets and liabilities translated at the year end spot rate All other items translated at the historic exchange rate Stock of a subsidiary is excluded, unless QBU owns less than 10% Regulations employ an 8-step method to isolate change in net worth of QBU to currency movements 16 16

17 Net Unrecognized Section 987 Gain or Loss - Treas. Reg

18 Unrecognized Section 987 Gain or Loss - Treas. Reg Step 1 Step2 Determine the change in the owner functional currency net value (OFCNV) of the QBU for the taxable year Increase the amount determined in Step 1 by the amount of assets transferred from the QBU to the owner, based on the spot rate on the day of the transfer for marked items, and the historic rate for historic items Step 3 Step 4 Step 5 Step 6 Step7 Decrease the amount determined in Steps 1 and 2 by the amount of assets transferred from the owner to the QBU Decrease the amount determined in Steps 1 through 3 by the amount of liabilities transferred from the QBU to the owner, based on the spot rate on the day of the transfer Increase the amount determined in Steps 1 through 4 by the amount of liabilities transferred from the owner to the QBU, based on the spot rate on the day of the transfer Decrease or increase the amount determined in Steps 1 through 5 by the section 987 taxable income or loss, respectively, of the QBU for the taxable year Increase the amount determined in Steps 1 through 6 by any expenses that are not deductible in computing the taxable income or loss of the QBU for the taxable year Step 8 Decrease the amount determined in Steps 1 through 7 by the amount of any tax-exempt income 18

19 Recognized Section 987 Gain or Loss Under Treas. Reg Owner generally recognizes gain or loss upon remittance or termination But see gain and loss deferral rules under Temp. Treas. Reg T Amount of Section 987 gain or loss on a remittance equals Net unrecognized 987 gain or loss X Remittance proportion (as defined in Treas. Reg (b)) 19 19

20 Character and Source Under Treas. Reg Section 987 gain or loss is ordinary Sourced using the asset method under Temp. Treas. Reg T(g) Included in the foreign currency category of foreign personal holding company income to the extent sourced to assets that give rise to subpart F income Does not qualify for business needs exception May offset Section 988 gains and losses in the same category 20 20

21 Partnerships Under Treas. Reg Partnerships The regulations only apply to partnerships in which all partners are related A partnership with related partners is not itself a QBU A partnership with related partners that owns a QBU is referred to as an aggregate partnership If a partner and aggregate partnership s QBU have different functional currencies, the items of the QBU are allocated to such partner based on a liquidation value percentage methodology 21

22 Terminations Under Treas. Reg A termination generally results in recognition of any net unrecognized Section 987 gain or loss QBU terminates when: The trade or business of the QBU ceases (two-year wind up period) The QBU transfers substantially all of its assets (as defined in Section 368(a)(1)(C)) to its owner) The owner of the QBU ceases to exist or A CFC owner of the QBU ceases to be a CFC Special rules for certain Section 332 liquidations and Section 381(a)(2) reorganizations Annual deemed termination election available Results in the recognition of section 987 gain or loss of a QBU on an annual basis Allows taxpayer to elect to translate all QBU items at the yearly average exchange rate for purposes of calculating the QBU s taxable income 22 22

23 Elections and Record Keeping Requirements Under Treas. Reg Section 987 elections Made by the owner (or the controlling domestic shareholders in the case of CFCs) Must attach a statement to the timely filed tax return for the first taxable year in which the election is relevant Election made on QBU-by-QBU basis (except for grouping and annual deemed termination elections) Revocation of any election requires the consent of the IRS (annual deemed termination election not revocable) Recordkeeping requirements Taxpayer must keep a copy of its Section 987 elections and Maintain 12 categories of information specified in Treas. Reg (b), including annual computations of unrecognized Section 987 gain or loss 23 23

24 Summary of Elections 24 24

25 Deferral Events, Transition Rules and Effective Date 25

26 Treatment of deferral events See Temp. Treas. Reg T(b) and (c) Domestic-to-domestic transfer Foreign-to-foreign transfer US1 CFC1 US$ US2 EUR QBU CFC2 US$ EUR QBU EUR QBU EUR QBU Substantially all of the assets (or interest) transferred within controlled group No 987 gain or loss recognized after 6 January 2017, even if not subject to the final regulations but deferred amount may be recognized upon a future remittance from EUR QBU or when EUR QBU ceases to be owned by a controlled group member Any outstanding deferred 987 gain or loss must be adjusted under transition rules 26

27 Treatment of an outbound loss event See Temp. Treas. Reg T(d) Before transfer After transfer US1 US1 US2 EUR QBU US2 EUR CFC Substantially all of the assets (or interest) transferred by a US person to a foreign person that is a member of the transferor s controlled group No 987 loss recognized after 6 January 2017, even if not subject to the final regulations but unrecognized 987 loss increases basis in EUR CFC stock EUR CFC stock basis must be adjusted under the fresh start transition rules 27

28 Fresh Start Transition Rules Fresh Start Transition Rules Upon the transition date (i.e., the effective date of the regulations) All QBUs are deemed to terminate the day prior to the transition date No section 987 gain or loss is recognized as a result of the deemed termination The owner is deemed to transfer all the assets and liabilities of the QBU to a new QBU Assets and liabilities are translated at their historic rate (determined based on reasonable assumptions, consistently applied) Taxpayers must consider DTAs/DTLs that may be created upon the transition date with respect to section 987 in the quarter that includes December 7,

29 Effective Dates Final Regulations apply to taxable years beginning on or after one year after the first day of the first taxable year following 7 December so 1January 2018 for calendar year taxpayers Taxpayer can apply the Final Regulations to taxable years beginning after 7 December 2016, but only if the taxpayer consistently applies the Regulations with respect to all QBUs Section 987 Transition Information must be filed with the timely filed return for the first taxable year to which the Regulations apply 29 29

30 Sample Compliance Timeline 2010 January 2017 TIME LINE 01 Lorem Inventory ipsum DTAs dolor and sit DTLs amet, related to consectetuer section 987 under adipiscing current method elit, sed Evaluate diam nonummy impact of nibh new euismod regulations on tincidunt DTA/DTL ut in laoreet the dolore quarter magna that aliquam includes erat December volutpat. 7, 2016 Jan-May 2017 Assess potential loss planning Consider resetting basis of marked items with built in gain Monitor potential changes Feb July 2017 Establish process for accessing necessary data for calculating income and exchange gain or loss (e.g., historic exchange rates for PPE) Assess potential elections July Sept 2017 Perform pro forma calculations Establish method for mapping fixed asset schedules and dates placed in service to 987 tool Test calculations Assess Provision Impact Tax Planning Design Implement 30

31 Section 988 Loss Deferral 31

32 Section 988 Loss on Intercompany Loans Temporary Regulations defer a borrower s Section 988 loss on a nonfunctional currency loan if: Loan is from a related person (within the meaning of Section 267(b) or 707(b)), and The transaction resulting in the loss has a principal purpose of avoiding Federal income tax Loss is deferred until the end of the term of the loan, determined immediately prior to the transaction Applies to any exchange loss realized on or after 6 December

33 ASC

34 ASC 740 Implications Adjust any existing DTA/DTL for section 987 gain/loss Determine the amount of unrecognized section 987 gain/loss as computed under current method that is expected to be recognized prior to beginning of fresh start year, based on expected remittances and taking into account the loss deferral rules Record DTAs/DTLs for assets and liabilities that are expected to be on the QBU s balance sheet immediately before the fresh start year begins All assets and liabilities of a QBU should have a tax basis translated at historic exchange rates at the beginning of the fresh start year The DTAs/DTLs should be based on the difference between 2016 exchange rate and the historic exchange rate for each item Taxpayers must consider DTAs/DTLs that may be created upon the transition date with respect to section 987 in the quarter that includes December 7,