On February 13, 2018, the International Tax Institute (ITI) held a seminar (U.S. Tax Reform Guidance Update with Treasury). Panelists included Chip Harter, Deputy Assistant Secretary (International Tax Affairs) of the U.S. Treasury; Paul Oosterhuis, Of Counsel at Skadden, Arps, Slate, Meagher & Flom LLP; and Philip Fried, Tax Principal at PwC.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, P.L. 115-97 (TCJA). The TCJA reduces the corporate tax rate from 35% to 21%; provides a 100% dividends-received deduction (DRD) for the foreign-source portion of dividends paid from 10%-owned foreign subsidiaries to U.S. corporations (e.g., participation exemption); requires U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income global intangible low-taxed income (GILTI); and provides a minimum tax on base erosion payments (BEAT).
Section 951A(b)(1) defines GILTI as the excess of the U.S. shareholder’s net CFC tested income for the taxable year over the shareholder’s net deemed tangible income return for the taxable year. GILTI is included in the U.S. shareholder’s gross income under section 951A. There is a deemed paid foreign tax credit equal to 80% of the U.S. corporation’s inclusion percentage multiplied by the aggregate tested foreign income taxes paid or accrued by CFCs. Section 904(d)(1) (foreign tax credit limitation) has been amended to include GILTI. The panel said that taxpayers will need to determine whether to allocate R&D, as well as interest and royalty payments by CFCs to U.S. shareholders, to the GILTI or general limitation baskets.
The FDII rules encourage the development of intangibles in the U.S., with a reduced tax on a U.S. corporation’s intangible income derived from foreign use. A corporation will pay an effective rate of 13.125% (rather than 21%) on its FDII. The panel mentioned that FDII has created concern with the WTO, which may consider this provision an “export subsidy.” FDII has also raised eyebrows at the OECD, which potentially considers FDII a “harmful tax practice.” Treasury would argue that FDII does not create “harm” under patent box/IP regimes. The U.S. needs to engage with the OECD Forum on Harmful Tax Practices (FHTP), as well as with its trading partners that may currently be creating defensive rules to counter FDII (e.g., deny deductions).
With the addition of BEAT, the U.S. will impose a minimum tax on certain deductible payments to a related foreign person. This tax applies to taxpayers with average annual gross receipts for the three-year tax period ending with the preceding tax year of at least $500 million and a base erosion percentage for the taxable year of 3% (2% for banks and securities dealers). (See section 59A.) The panel discussed the disallowance of below-the-line (not included in cost of goods sold or COGS) deductions on payments to foreign related parties. Taxpayers will need to determine what is considered a “specified payment” under BEAT.
Under the TCJA, base erosion payments do not include any amounts paid or accrued by a taxpayer for services if (1) the services meet the requirements for eligibility for use of the SCM under section 482, and (2) the amounts constitute the total services cost with no markup component. The panel said that Treasury is considering additional guidance on this issue.
Click here for more information on our BEPS research and technology solutions to address your immediate and ongoing needs.