Summary of proposed section 951A GILTI regulations

Transcription

1 Delitte Tax LLP Summary f prpsed sectin 951A GILTI regulatins The Treasury and the IRS n September 13 released prpsed regulatins addressing the new Glbal Intangible Lw-Taxed Incme (GILTI) prvisin f the 2017 tax law. Belw is a high-level utline f sme key pints frm the regulatins. An attempt has been made t rganize this int a framewrk that tracks thrugh the apprach f the regulatins, hwever, it will nt track directly. As a practical matter, the regulatins are 157 pages lng and generally apply t taxable years f freign crpratins beginning after December 31, 2017, and t taxable years f US sharehlders in which r within which such taxable years end. Hwever, certain ther prvisins that were added t regulatins under sectin have different effective dates. Anti-Abuse Prvisins The prpsed regulatins include significant anti abuse regulatins which impact the calculatin f the amunt f a U.S. sharehlder s QBAI as well as the amunt f its tested incme. These prvisins will have a significant impact n the calculatin f GILTI ging frward. Amunt f QBAI: The prpsed regulatins prvide that specified tangible prperty f a tested incme CFC is disregarded fr purpses f determining the tested incme CFC s average aggregate basis in specified tangible prperty if the tested incme CFC acquires the prperty with a principal purpse f reducing the GILTI inclusin amunt f a U.S. sharehlder and hlds the prperty temprarily but ver at least ne quarter end. Calculatin f Tested Incme: The prpsed regulatins disallw the benefit f a stepped-up basis in specified tangible prperty transferred between related CFCs during the perid befre the transferr CFC s first inclusin year fr purpses f calculating the transferee CFC s QBAI. Accrdingly, the prpsed regulatins prvide that a taxpayer cannt reduce its GILTI inclusin amunt fr any taxable year by reasn f a stepped-up basis in CFC assets attributable t transactins between related CFCs during the perid after December 31, 2017, but befre the effective date f sectin 951A. September 14,

2 Ptential Impact: These prvisins apply t reduce the ptential QBAI. In additin, they als t deny the amrtizatin with respect t intangible prperty r depreciatin attributable t the step up in basis in bth tangible persnal in calculating tested incme. Hwever, because this rule appears limited t amrtizatin and depreciatin, it des nt appear t apply t reductins in grss incme as a result f COGS, the reductin f gain n the sale f prperty, and ther electins and transactins that might impact tested incme. Calculatin f Tested Incme Tested Incme: The prpsed regulatins require that tested incme r tested lss f a CFC be determined by treating the CFC as a dmestic crpratin taxable under sectin 11 and by applying the principles f sectin 61 and the regulatins thereunder. Therefre, nly items f deductin that wuld be allwable in determining the taxable incme f a dmestic crpratin may be taken int accunt fr purpses f determining a CFC s tested incme r tested lss. In additin, if an item f a CFC wuld be disallwed as a deductin in determining the CFC s taxable incme if the CFC were a dmestic crpratin, the item cannt be taken int accunt fr purpses f determining the tested incme r tested lss. Crdinatin with : The prpsed regulatins require that the grss incme and allwable deductin determinatins are made under the rules f (i.e., generally treat the CFC as a dmestic crpratin fr purpses f cmputing its grss incme and taxable incme, same as fr subpart F incme purpses). Impact f sectins 163(j), 245A and 267A: N specific guidance is prvided n the impact f these prvisins and the prpsed regulatins request cmments the interactin f sectin 163(j) and 267A t GILTI. High Taxed Exclusin frm GILTI: The prpsed regulatins prvide that this exclusin applies nly t incme that is excluded frm freign base cmpany incme and insurance incme slely by reasn f an electin made t exclude the incme under the high-tax exceptin f sectin 954(b)(4). Accrdingly, the exclusin des nt apply t incme that wuld nt therwise be subpart F incme r t categries f incme that d nt cnstitute subpart F incme due t exceptins ther than the high-tax exceptin (fr example, as a result f an exceptin t freign persnal hlding cmpany incme under sectin 954(c)(6) r sectin 954(h)). Impact f 952(c): The prpsed regulatins prvide that tested incme and tested lss are determined withut regard t the applicatin f sectin 952(c). Allcatin and Apprtinment f Deductins: The prpsed regulatins prvide that allwable deductins determined under the principles f are allcated and apprtined t grss tested incme under the principles f sectin 954(b)(5) and (c), treating grss tested incme that falls within a single separate categry (as defined in (a)(1)) as an additinal categry f incme fr this purpse. Tested Lss CFC and QBAI: The prpsed regulatins prvide that a tested lss CFC des nt have specified tangible prperty. Accrdingly, September 14,

3 QBAI fr purpses f calculating its GILTI inclusin amunt, a U.S. sharehlder des nt take int accunt the tangible prperty f a tested lss CFC in calculating its pr rata share f QBAI, its deemed tangible incme return r its net deemed tangible incme return. In General: Tested incme CFC s QBAI fr any taxable year is the average f the CFC s aggregate adjusted bases as f the clse f each quarter in specified tangible prperty that is used in a trade r business f the crpratin and f a type with respect t which a deductin is allwable under sectin 167. The regulatins prvide a rule fr dual use prperty. Tangible prperty is defined as prperty fr which the depreciatin deductin prvided by sectin 167(a) is eligible t be determined under sectin 168 (even if the CFC has elected nt t apply sectin 168). The prpsed regulatins define tangible prperty by reference t whether the prperty can be depreciated under sectin 168. The prpsed regulatins prvide a methdlgy t reduce the QBAI f a CFC with a shrt taxable year t an amunt that, if annualized, wuld prduce an amunt equal t the QBAI fr a 12-mnth taxable year. Determinatin f Basis: The adjusted basis in any prperty is determined by using the alternative depreciatin system under sectin 168(g) ( ADS ) and allcating the depreciatin deductin with respect t the prperty ratably t each day during the perid in the taxable year t which the depreciatin relates. ADS applies fr purpses f determining QBAI irrespective f whether the basis f the prperty is determined using anther depreciatin methd fr ther purpses f the Cde. In additin, the regulatins prvide that regardless f the date acquired, the adjusted basis in specified tangible prperty shuld be determined under ADS in rder fr the U.S. sharehlder s pr rata share f QBAI t be prperly determined and nt distrted. Ptential Impact: The prpsed regulatins prvide that when determining QBAI, the adjusted basis in prperty placed in service befre December 22, 2017, is determined using ADS as if this system had applied frm the date that the prperty was placed in service. Prperty Held Thrugh a Partnership: The prpsed regulatins determine a CFC partner s share f the partnership s adjusted basis in specified tangible prperty by reference t the partnership s average adjusted basis in the prperty as f the clse f each quarter f the partnership s taxable year that ends with r within the CFC s taxable year. In additin, the prpsed regulatins prvide that a CFC partner determines its share f the partnership s average adjusted basis in specified tangible prperty based n the amunt f its distributive share f the grss incme prduced by the prperty that is included in the CFC partner s grss tested incme relative t the ttal amunt f grss incme prduced by the prperty September 14,

4 Determinatin f Pr-Rata Share Tested Incme: A U.S. sharehlder's pr rata share f tested incme generally is determined in the same manner as its pr rata share f subpart F incme under sectin 951(a)(2) and (b) and (e) (that is, based n the relative amunt that wuld be received by the sharehlder in a year-end hypthetical distributin f all the CFC s current year earnings). QBAI: Fr purpses f determining a U.S. sharehlder s pr rata share f a CFC s QBAI, the amunt f QBAI distributed in the hypthetical distributin f sectin 951(a)(2)(A) and (e) is generally prprtinate t the amunt f the CFC s tested incme distributed in the hypthetical distributin. Hwever, a special rule in the prpsed regulatins prvides that if a CFC s QBAI exceeds 10 times its tested incme, s that the amunt f QBAI allcated t preferred stck wuld exceed 10 times the tested incme allcated t the preferred stck under the general prprtinate allcatin rule, the excess amunt f QBAI is allcated slely t the CFC s cmmn n stck. Tested Lss: Fr purpses f determining a U.S. sharehlder s pr rata share f a CFC s tested lss, the amunt distributed in the hypthetical distributin is the amunt f the tested lss, rather than the CFC s current earnings and prfits, and the tested lss is distributed slely with respect t the CFC s cmmn stck, except in certain cases invlving dividend arrearages with respect t preferred stck and cmmn stck with n liquidatin value. Dividend Arrearages: The prpsed regulatins prvide that any amunt f tested lss that wuld therwise be distributed in the hypthetical distributin t a class f cmmn stck that has n liquidatin value is instead distributed t the mst junir class f equity with a psitive liquidatin value t the extent f the liquidatin value. In subsequent years, tested incme is allcated t any class f stck t the extent that tested lss was allcated t such class in prir years under this special rule. Special rule fr transfers f CFC Stck: The prpsed regulatins prvide that sectin 951(a)(2)(B) is applied t reduce tested lsses, but mdified t treat the amunt f a dividend received by anther persn as equal t the amunt f the tested lss, withut regard t whether an actual dividend is made by the tested lss CFC. The effect f this rule is t reduce a sharehlder s pr rata share f tested lss in prprtin t the number f days the sharehlder did nt wn the stck f the tested lss CFC within the meaning f sectin 958(a). Tested Interest Incme and Expense: The prpsed regulatins prvide that a U.S. sharehlder s specified interest expense is the excess f its aggregate pr rata share f the tested interest expense f each CFC ver its aggregate pr rata share f the tested interest incme f each CFC. Tested interest expense and tested interest incme are generally defined by reference t all interest expense and interest incme that is taken int accunt in determining a CFC s tested incme r tested lss. A U.S. sharehlder s pr rata share f a CFC s tested interest expense fr a taxable year equals the amunt by which the CFC s tested interest expense reduces the sharehlder s pr rata share f tested incme, increases the sharehlder s pr rata share f September 14,

5 tested lss, r bth. Cnversely, a U.S. sharehlder s pr rata share f tested interest incme fr a taxable year equals the amunt by which the CFC s tested interest incme increases the sharehlder s pr rata share f tested incme, reduces the sharehlder s pr rata share f tested lss, r bth. Freign Currency Translatin The prpsed regulatins apply the average exchange rate fr the taxable year f the freign crpratin fr translating tested items, i.e., a pr rata share f tested incme, tested lss, tested interest expense, tested interest incme, and QBAI. Similarly, a U.S. sharehlder s GILTI inclusin amunt that is allcated t a tested incme CFC under sectin 951A(f)(2) is translated frm U.S. dllars int the CFC s functinal currency using the average exchange rate fr the taxable year f the tested incme CFC. N special rules were prescribed fr translating QBAI f sectin 987 QBUs. Calculatin f GILTI With Respect t Stck Held by Dmestic Partnerships The prpsed regulatins prvide that, in general, a dmestic partnership that is a U.S. sharehlder f ne r mre CFCs ( U.S. sharehlder partnership ) cmputes its wn GILTI inclusin amunt in the same manner as any ther U.S. sharehlder, and each partner takes int accunt its distributive share f the dmestic partnership s GILTI inclusin amunt under sectin 702 and (a)(8)(ii). Hwever, partner that is itself a U.S. sharehlder (within the meaning f sectin 951(b)) ( U.S. sharehlder partner ) f ne r mre CFCs wned directly r indirectly by a dmestic partnership ( partnership CFC ) is treated as wning prprtinately sectin 958(a) stck in each such partnership CFC as if the partnership were a freign partnership. As a result, a partner that is itself a U.S. sharehlder f a CFC wned by a dmestic partnership cmputes its GILTI inclusin amunt fr a taxable year by taking int accunt its prprtinate share f the partnership s pr rata share f each f the relevant items tested incme, tested lss, QBAI, tested interest incme, and tested interest expense f such CFC. This rule applies regardless f whether the dmestic partnership itself has a GILTI inclusin amunt fr the taxable year. A U.S. sharehlder partnership is therefre required t prvide t its partners their distributive share f the partnership s GILTI inclusin amunt, as well as prvide t each U.S. sharehlder partner the partner s prprtinate share f the partnership s pr rata share (if any) f each CFC tested item f each partnership CFC f the partnership, and frms and instructins will Mdificatin t Pr Rata Share Rules: The ntice f prpsed rulemaking prpses t amend (e) t address certain structures that the IRS and Treasury have deemed abusive. These rules implicate sectin 951A as well as sectin 951. The prpsed regulatins prvide that, fr purpses f determining a U.S. sharehlder s pr rata share f subpart F incme, earnings and prfits fr the taxable year are first hypthetically distributed amng the classes f stck and then hypthetically distributed t each share in the class n the hypthetical distributin date, which is the last day f the CFC s taxable year n which it is a CFC. September 14,

6 In lieu f prescribing a determinatin based n fair market value, the prpsed regulatins prvide that the amunt f earnings and prfits that wuld be distributed with respect t classes f stck is based n all relevant facts and circumstances. Additinal Prvisin: The prpsed regulatins disregard any transactin r arrangement that is part f a plan a principal purpse f which is t reduce a U.S. sharehlder s pr rata share f the subpart F incme f a CFC. This rule als applies fr purpses f determining a U.S. sharehlder s pr share f amunts fr purpses f calculating the sharehlder s GILTI inclusin amunt. The prpsed regulatins als mdify (e) in specific ways t take int accunt sectin 951A. Other Prvisins Freign Tax Credit Prvisins: The prpsed regulatins d nt include any rules relating t freign tax credits r the deductin under sectin 250. Rules relating t freign tax credits and the deductin under sectin 250 will be included in separate ntices f prpsed rulemaking. It is anticipated that the prpsed regulatins relating t freign tax credits will prvide rules fr assigning the sectin 78 grss-up attributable t freign taxes deemed paid under sectin 960(d) t the separate categry described in sectin 904(d)(1)(A) (e.g., GILTI basket). GILTI and UBIT: The characterizatin f GILTI inclusins fr purpses f determining the unrelated business taxable incme f tax-exempt entities is nt addressed in this package and will be addressed in separate guidance. Sectin 267(a)(3)(B) and 163(e)(3)(B): The prpsed regulatins prvide that a deductin is allwed under sectins 163(e)(3)(B)(i) and 267(a)(3)(B) fr an item taken int accunt in determining the net CFC tested incme f a U.S. sharehlder, including a U.S. sharehlder treated under the prpsed regulatins as wning sectin 958(a) stck f a CFC wned by a dmestic partnership. In the case f a U.S. sharehlder that is a dmestic partnership, this rule applies nly t the extent that ne r mre U.S. persns (ther than dmestic partnerships) that are direct r indirect partners f the dmestic partnership include in grss incme their distributive share f the partnership s GILTI inclusin amunt r the item is taken int accunt by a U.S. sharehlder partner f the dmestic partnership. Basis Adjustments fr Tested Lss CFCs: In the case f a crprate U.S. sharehlder (excluding regulated investment cmpanies and real estate investment trusts), fr purpses f determining the gain, lss, r incme n the direct r indirect dispsitin f stck f a CFC, the basis f the stck is reduced by the amunt f tested lss that has been used t ffset tested incme in calculating net CFC tested incme f the U.S. sharehlder. The basis reductin is nly made at the time f the dispsitin and therefre des nt affect the stck basis prir t a dispsitin. Cnslidated Grups: The regulatins prvide special prvisins t address the calculatin f GILTI in the case f a cnslidated grup and include regulatins under sectin In additin, the regulatins prvide a rule similar t the rule applicable t the dispsitin f a tested lss CFC, t mitigate the duplicatin f lsses attributable t tested lss CFCs. September 14,

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