U.S. TAX REFORM: INTERNATIONAL IMPLICATIONS

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1 DID YOU GET YOUR BADGE SCANNED? U.S. TAX REFORM: INTERNATIONAL IMPLICATIONS #TaxLaw #FBA Username: taxlaw Password: taxlaw18

2 PanelistS Jorge Castro, Castro Strategies LLC Alan Granwell, Sharp Partners Itai Grinberg, Georgetown University Law Center Rose Jenkins, Senior Counsel, B:2, ACCI Brenda Zent, Department of Treasury Moderator: Mindy Herzfeld, University of Florida Levin College of Law

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4 Provisions Impacting Inbound businesses Limitation on Business Interest Amended Section 163(j) Base Erosion Anti-Abuse Tax New Section 59A Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person New Section 864(c) / 1446 Certain Related Party Amounts Paid or Accrued in Hybrid Transactions or With Hybrid Entities New Section 267A Anti-inversion provisions

5 INTEREST EXP LIMITATION New Section 163(j)

6 Section 163(j) Limitation on Business Interest SEC. 163(j) LIMITATION ON BUSINESS INTEREST. (1) In General The amount allowed as a deduction under this chapter for any taxable year for business interest shall not exceed the sum of (A) the business interest income of such taxpayer for such taxable year, (B) 30 percent of the adjusted taxable income of such taxpayer for such taxable year, plus (C) the floor plan financing interest of such taxpayer for such taxable year. The amount determined under subparagraph (B) shall not be less than zero. Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017)

7 Limitation on Business Interest Section 3301 of the TCJA amends Section 163(j) and generally limits the net interest expense deduction for every business, regardless of form, to 30% of adjusted taxable income. Amount disallowed is then carried forward into the succeeding taxable year. Special rules to allow a pass-through entity's owners to use the unused interest limitation for the tax year and to ensure that net income from pass-through entities would not be double-counted at the partner level.

8 Section 163(j): Other considerations Old section 163(j) still applies for taxable years beginning on or before 12/31/2017 disallowed a deduction for disqualified interest paid or accrued by a corporation in a taxable year if two threshold tests were satisfied: 1) the payor's debt-to-equity ratio exceeded 1.5 to 1.0 (the safe harbor ratio); and 2) the payor's net interest expense exceeded 50 percent of its adjusted taxable income Before 2022, defined as EBITDA Beginning January 1, 2022, restricted to mean EBIT

9 Limitation on Business Interest Policy Background and Goals Policy Questions EBITDA / EBIT change expected to stay? Floor plan financing? Other carve-outs? Section 163(n) (not enacted): worldwide group ratio: Does it have a future? Section 385 regulations?

10 Limitation on Business Interest Technical Questions Carryover of 163(j) limitation from old-section 163(j) Application to a consolidated group? Application to a CFC? Corporations and non-business interest Guidance Priority? Partnership rules? Section 382 rules? Conformity with International Trends OECD BEPS Action 4?

11 THE BEAT New Section 59A

12 Section 59A Base Erosion Anti- Abuse Tax SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH SUBSTANTIAL GROSS RECEIPTS. (a) Imposition of Tax. There is hereby imposed on each applicable taxpayer for any taxable year a tax equal to the base erosion minimum tax amount for the taxable year. Such tax shall be in addition to any other tax imposed by this subtitle. Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017).

13 Base Erosion Alternative Minimum Tax BEAT tax liability is the excess of the BEAT rate X modified taxable income, over Regular tax plus the research credit and a capped amount (not more than 80%) of certain other business credits Modified taxable income is regular taxable income Plus base eroding payments to related foreign persons, excluding: COGS, the cost component of certain services specified by reference to a modified version of Services Cost Method, and a portion of payments to related foreign persons subject to US withholding tax Only applies to US corporations with more $500 million of average annual gross receipts over the prior 3-year period and with base eroding payments to related foreign persons in excess of 3% of total deductions allowable (other than specified ones including GILTI, NOLs, participation exemption) Applies to both US and Non-US headquartered companies 5 percent rate in 2018 goes up to 10 percent in 2019 and 12.5 percent in 2025

14 BEAT (cont.) Special rates for banks and securities dealers: rates increased by 1 percentage pt 5 percent rate in 2018 goes up to 10 percent in 2019 and 12.5 percent in 2025 Special rules if payment subject to withholding Special rules for qualified derivative payments Doesn t apply to RICs, REITs or S Corps Base erosion percentage = 2% for registered securities dealer Special rules for companies that invert after Nov. 9, 2017

15 Base Erosion Anti-Abuse Tax Policy Questions Overly broad in the drafting? Technical corrections expected? Reactions from overseas? A transfer pricing solution? Guiding principles in reg drafting?

16 Base Erosion Anti-Abuse Tax Technical Questions Cost of Goods Sold Definition What s a payment that reduces gross receipts? Services industry: Cost plus mark-up Repos / financial instruments 25% relatedness / constructive ownership rules Payments made by a partnership? Payments that are ECI / financial services industry Cross-licensing? Guidance Priorities?

17 SALE OF PARTNERSHIP INTEREST New Section 864(c)

18 Section 864(c) Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person Section 864(c) is amended by adding at the end the following: (8) GAIN OR LOSS OF FOREIGN PERSONS FROM SALE OR EXCHANGE OF CERTAIN PARTNERSHIPINTERESTS. (A) IN GENERAL. Notwithstanding any other provision of this subtitle, if a nonresident alien individual or foreign corporation owns, directly or indirectly, an interest in a partnership which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such interest shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B). Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017).

19 Section 1446 Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person Section 1446 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following: (f) SPECIAL RULES FOR WITHHOLDING ON DISPOSITIONS OF PARTNERSHIP INTERESTS. (1) IN GENERAL. Except as provided in this subsection, if any portion of the gain (if any) on any disposition of an interest in a partnership would be treated under section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017).

20 Section 1446 Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person (2) EXCEPTION IF NONFOREIGN AFFIDAVIT FURNISHED. (A) IN GENERAL. No person shall be required to deduct and withhold any amount under paragraph (1) with respect to any disposition if the transferor furnishes to the transferee an affidavit by the transferor stating, under penalty of perjury, the transferor s United States taxpayer identification number and that the transferor is not a foreign person. Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017).

21 Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person Section 864(c) essentially overrules the recent Tax Court case of Grecian Magnesite, which reversed a long-standing IRS position (Rev. Rul ) Withholding rules similar to withholding for enforcement of FIRPTA

22 Taxation of Gain or Loss on the Sale of Partnership Interest by a Foreign Person Policy Issues Should 864(c) be seen to override tax treaties? Technical Issues? Guidance Priority? Withholding guidance? Applicability to value of entire partnership interest, not just ECI, unless Secretary issues regulatory guidance? Exemption for publicly traded partnership interests? Temporary suspension under Notice

23 HYBRIDS

24 Section 267A Certain Related Party Amounts Paid or Accrued in Hybrid Transactions or With Hybrid Entities (a) IN GENERAL. No deduction shall be allowed under this chapter for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. Tax Cuts and Jobs Act, H.R. 1, 115th Cong (2017).

25 Hybrid Payments No deduction for related-party interest and royalty payments if there is no inclusion (or there is a deduction) by the recipient Applies to hybrid transactions and payments to hybrid entities Carve-out for payments to the extent included in the gross income of a U.S. shareholder as subpart F income (but does apply if GILTI income) Regulatory authority to address other transactions

26 Hybrid Traps FC1 FC2 US LP Interest

27 Hybrids Policy issues U.S. adoption of BEPS? End-run around CTB rules? Any impact on foreign-to-foreign base eroding payments? Technical Questions Why not payments included under GILTI excluded? Technical Guidance Priority?

28 ANTI-INVERSION PROVISIONS

29 Inverted Companies A base-eroding payment, even if for cost of goods sold, is a bad BEAT payment if made to entity that inverted after Nov. 9, 2017 (Section 59A(d)(4) Reduction in deduction allowable for inclusion under section 965 (section 965(l)) if US shareholder becomes expatriated entity within 10 years Dividends from expatriated entities (that expatriated after date of TCJA) not eligible for reduced rate under section 1(h)(11)

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