All you ever wanted to know about the BEAT and other exciting but ignored provisions of the Tax Cuts and Jobs Act

Transcription

1 All you ever wanted to know about the BEAT and other exciting but ignored provisions of the Tax Cuts and Jobs Act by Ian Shane, Esq. Prime Global 2019 Tax Conference January 6-9, 2019

2 BEAT BEAT imposes a minimum tax on outbound, related party payments that have inappropriately reduce the U.S. Federal Income Tax base 2

3 BEAT While the inappropriate deductions remain deductible, BEAT imposes an additional amount of: 5% for % for % thereafter on the deduction Banks and registered security dealers pay an additional 1% 3

4 BEAT BEAT and Transfer Pricing are different, although both focus on Intercompany Pricing Arms Length pricing will not put a multi-national outside BEAT AND Non-Arms Length pricing will not, by itself, trigger BEAT 4

5 BEAT BEAT applies only to C Corps. Two conditions must be met 1. The Corp. must have average annual domestic gross receipts for the prior 3 years of $500M of more 2. The Corp s Base Erosion Percentage for the tested year must be 3% or more 2% for certain businesses 5

6 BEAT The $500M gross receipt test is calculated on aggregation rules These rules treat all Corps. which are part of the same controlled group as a single Corp. These aggregation rules include foreign Corps. in the controlled groups but only look at U.S. domestic income. 6

7 BEAT The base erosion percentage test determines whether inappropriate deductions exceed the statutory level of 3% of a Corp s total deductions. The 3% level is reduced to 2% for banks and security dealers. 7

8 BEAT If the taxpayer exceeds the applicable threshold, it is subject to BEAT liability. Remember BEAT only applies to related party deductible payments. 8

9 Related Parties Related is a broad term and includes: Any 25% owner of the taxpayer by vote or value Entities that are more than 50% owned directly, indirectly, or constructively - by the taxpayer or a 25% owner of the taxpayer Any person related under Code 482 Transfer Pricing Rules. 9

10 BEAT After identifying deductible payments made to related foreign persons, it is necessary to identify any base erosion payments. There are 3 types: 1. Deductible Payments made to related foreign parties. These do not include any interest expense that is disallowed under Section 163(j). 2. Payments to a Related Foreign Person in connection with the Acquisition of Amortizable or Depreciable Property. 10

11 BEAT 1. Reinsurance Premiums or other consideration paid to a related foreign person. 2. Payments to members of an inverted group that results in a reduction of the taxpayer s gross receipts. This means payments that are otherwise within the COGs exception are, for Inverted Groups, pulled back into the scope of BEAT. 11

12 Exclusions The new legislation contains some deductible payments excluded from the calculation of base erosion payments. These are: Payments of certain services that meet the services cost method treatment of Treas. Reg

13 Exclusions These services are basically Payroll, Human Resources, IT Support and Bookkeeping, but there are others as set out in the Angel List in Rev. Proc AND Low Margin services meaning services that have a mark-up of 7% or less. 13

14 Exclusions The services must not be on the IRS Blacklist in Treas. Reg which includes: Manufacturing, Production, Construction, Reselling, Distribution, Research or Engineering. The taxpayer must maintain adequate books and records to identify payments to related foreign parties. 14

15 Exclusions Cost of Goods Sold (COGS) Amounts paid or accrued to a Related Foreign Person and recovered through COGS are not Base Erosion Payments Costs related to services, leases, licenses and other nonsales transactions are not excluded from BEAT unless they qualify under another exception. 15

16 BEAT Payments subject to withholding tax Excluded from Base Erosion Payments are any payments subject to withholding at the full statutory rate of 30%. If withholding is reduced by a tax treaty only a proportionate share of the payment is excluded from BEAT. 16

17 Reporting Section 6038A as amended requires BEAT specific information reporting Taxpayers are required to complete new Form 8991 Which is currently in draft form. 17

18 Controlled Foreign Corporations The US may in theory be moving from a worldwide corporate tax system to a territorial system, BUT The CFC F regime remains and is expanded by the Tax Cuts and Jobs Act We also have GILTI which taxes foreign income not remitted to the U.S. 18

19 Controlled Foreign Corporations The Act expands the definition of what is a CFC It expands the stock attribution rules to downstream foreign corporations 19

20 Controlled Foreign Corporations The Act also Expands the definition of US Shareholder to include US persons owning stock representing 10%+ of the value of the foreign corporation as opposed to just 10%+ of voting rights as was the test before the Act. 20

21 Controlled Foreign Corporations The Act repeals the 30 day rule which required a US Shareholder to hold shares in the foreign corporation for an uninterrupted period of at least 30 days in a tax year, to be subject to the Subpart F deemed dividend regime. Now a US Shareholder only has to hold shares in the foreign subsidiary for one day to be sucked into the Subpart F inclusion. 21

22 Controlled Foreign Corporations The most significant of these changes is the expansion of the CFC attribution rules. The new provision would eliminate the current constructive ownership rule that prevents downward attribution of stock owned by a foreign person to a US person. 22

23 Controlled Foreign Corporations As a result, stock owned by a foreign corporation can be treated as constructively owned by its wholly-owned domestic subsidiary. 23

24 Controlled Foreign Corporations Downward attribution Foreign Shareholders 100% 100% Foreign Corporation (Parent) US Corporation (US Sub.) 51% Foreign Corporation (Foreign Sub. 1) 75% Foreign Corporation (Foreign Sub. 2) 24

25 Controlled Foreign Corporations The new attribution rules will cause many foreign group non-cfc corporations to become CFC s. This will cause increased US reporting (Form 5471) and other unintednded consequences. It will not increase Subpart F inclusion because Code 958(a) requires direct or indirect ownership for Subpart F inclusion to apply, not constructive ownership. The new attribution provision applies to the last tax year of the foreign corporation beginning BEFORE January 1, So it can be effective for

26 Controlled Foreign Corporations The High Tax Exception The US federal tax rate for corporations has been cut to a flat 21%. But Congress has not amended the high tax exception to subpart F inclusion. i.e., the subpart F regime does not apply if the foreign tax rate is higher than 90% of the US corporate rate. This means that if the CFC is taxed at 18.9% or less the US taxpayer can elect to exclude Subpart F income. 26

27 Controlled Foreign Corporations This provides tax planning possibilities for multinational groups. Ireland has a tax rate of 12.5% for certain types of income as does Cyprus. The UK currently has a flat corporate tax rate of 19% going down to 17% over the next two years. Will countries looking to attract U.S. investment reduce their corporate tax rates to 18.9% or less? 27

28 Sale of Partnership Assets by Foreign Persons In 1991, the IRS issued Rev. Rul It stated that a foreign partner s capital gain or loss on the sale of a partnership interest is effectively connected with a US trade or business to the extent that a sale of the underlying assets by the partnership would have resulted in effectively connected US income for the foreign partner. 28

29 Sale of Partnership Assets by Foreign Persons In 2017 the Tax Court in the case of Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner refused to follow Rev. Rul and held that a foreign partner was NOT subject to US tax on a sale of a partnership interest. The IRS has appealed the Grecian Magnesite case but Congress has stepped in to enact Rev. Rul , which is now 864(c)(8) of the Code. 29

30 Sale of Partnership Assets by Foreign Persons The Act provides that gain or loss from the sale, exchange of a partnership interest is effectively connected with a U.S. trade or business. As a result, a foreign partner would have U.S. effectively connected gain or loss when he, she or it disposes of an interest in a U.S partnership or any entity treated as a partnership for federal tax purposes. 30

31 Sale of Partnership Assets by Foreign Persons The Act also requires that the purchaser of a US partnership interest from a non-us person, withhold 10% of the gross sales proceeds unless the transferor certifies that it is a US person and provides a US taxpayer identification number This is similar to the FIRPTA withholding requirements. 31

32 Sale of Partnership Assets by Foreign Persons If the transferee fails to withhold the correct amount, the Act imposes an obligation on the partnership to deduct and withhold from distributions to the transferee partner(s) an amount equal to the amount the transferee failed to withhold, plus interest. Drafters of LLC operating agreements and partnership agreements should add a clause allowing the partnership to recover such amounts from foreign expartners. 32

33 Questions?

34 Thank you! Ian Shane, Esq.