Seth Green is a principal and co-head of the international tax group of the Washington National Tax practice of KPMG LLP (U.S.). He is based in Washington, D.C.
Earlier in his career, Green spent four years with the U.S. Department of the Treasury’s Office of Tax Policy, where he served as both an associate tax legislative counsel and an attorney advisor.
Mr. Green answered the following questions for BEPS Global Currents on October 22, 2018 regarding the global intangible low-taxed income (GILTI) Proposed Regs released by Treasury on September 13, 2018 (the “Proposed GILTI Regs”):
Q: The Proposed GILTI Regs address computational issues and ambiguities, but are there any computational issues that you feel are still outstanding and would like resolved by Treasury?
A: As part of the U.S. Tax Cuts and Jobs Act (“TCJA”), Section 951A was enacted into law, and generally requires U.S. shareholders of controlled foreign corporations (“CFCs”) to include their pro rata share of GILTI in their gross income. The statutory framework for determining GILTI is quite complex and, as a result, taxpayers and practitioners needed guidance from Treasury in applying Section 951A.
The Proposed GILTI Regs do a good job of leading taxpayers through the mechanical steps involved in the computation of the GILTI provision. Although they do leave some important threshold questions unanswered — which I address below in discussing Sections 163(j), 245A, and 267A — most of the issues likely to arise from routine operations are well addressed by the Proposed GILTI Regs. Some of the nuances of the Proposed GILTI Regs, however, raise questions or pose possible significant issues in unusual situations.
For example, the U.S. partnership tax rules, which adopt a mixed entity/aggregate characterization for different partners, potentially appear to create the possibility of double-counting tested income or tested losses, where both aspects of the regime come into play. The rules regarding (deferred) basis adjustments in connection with the absorption of tested losses are also very complicated — and raise interesting policy questions as to why the approach taken was so drastically different from how the virtually identical issue was addressed under Section 965.
Q: Are you satisfied with how the Proposed GILTI Regs address GILTI calculations for U.S. shareholders of a consolidated group?
A: The consolidated group rules contained in the Proposed GILTI Regs are interesting. They certainly go a long way toward ensuring that the location of a particular CFC within the consolidated group will not create distortions in the computation of the group’s GILTI inclusion. For example, if one U.S. group member owns a tested loss CFC, while another owns a tested income CFC, the attributes will combine in determining the overall GILTI inclusion of the group.
However, the Proposed GILTI Regs do stop short of telling us that all consolidated group members are treated as a single U.S. shareholder for purposes of the GILTI rules. Thus, for example, it is unclear how the special rules for mid-year acquisitions of a tested loss CFC (referred to above) might apply, when the CFC moves between consolidated group members.
Q: The Proposed GILTI Regs say that future guidance will address the interaction of GILTI with FTCs, the Section 163(j) interest limitation, and the Section 267A anti-hybrid rules. Which of these are you looking forward to most, and why?
A: The two biggest issues here are clearly foreign tax credits (FTCs) and Section 163(j). It has been widely noted that the reference in the TCJA Conference Report to a 13.125% foreign tax rate as eliminating U.S. residual tax on GILTI income is true only if no expenses, other than the Section 250 deduction, are allocated to the GILTI basket. That result seems hard to find in the Code, taking into account both prior law and the changes made by the TCJA. Various theories have been floated as to how the government might ameliorate the impact of interest allocation (among other issues), and how to treat “look-through payments” made by CFCs earning tested income. The ultimate FTC guidance will presumably give us the answers to those questions, and might have significant impacts on the overall tax burden that taxpayers will bear from the new GILTI regime.
As to Section 163(j), there is again a tension between reasonable taxpayer expectations and a literal reading of the Code. On the one hand, it seems mind-bogglingly complex to try to apply Section 163(j) to a CFC, taking into account the three classes of income (Subpart F income, tested income, and a residual class of other income), especially when combined with the fact that Subpart F inclusions are limited by earnings and profits (to which the Section 163(j) limitation does not apply), and the adverse treatment of “specified interest” under the GILTI rules. Furthermore, existing proposed regulations limit the application of “old” Section 163(j) to the computation of effectively connected income (ECI) in the case of foreign corporations. Yet on the other hand, it is once again difficult to find a textual argument in the Code for the non-application of Section 163(j) in these contexts. Only time will tell how the government resolves these tensions.
Q: The Proposed GILTI Regs say that future proposed FTC regs will provide rules for assigning the Section 78 gross-up attributable to foreign taxes deemed paid to the GILTI FTC basket. Is this a good or bad result for taxpayers?
A: While each taxpayer’s FTC posture is unique, in general, this seems like it will be good news. The majority of taxpayers seem likely to be in an excess-credit position in the GILTI FTC basket. Thus, anything which increases income in that basket has to be good news — especially since excess GILTI credits cannot be carried forward or back.
Q: The Proposed GILTI Regs contain several anti-abuse rules. Do you feel they are too harsh for taxpayers?
A: In each case, the reason why the U.S. government might seek to apply an anti-abuse rule is clear. There is precedent going back to the U.S. Senate’s “Enron report” (and earlier) of the Section 951 pro-rata share rules being affirmatively used to “mis-measure” economic income. And there is no doubt that taxpayers could, in some cases, obtain significant qualified business asset investment (QBAI), or other basis benefits, from engaging in transitory or internal transactions with “real world” significance much less than the tax benefits they would produce. That being said, the particular rules contained in the Proposed GILTI Regs could prove to be problematic in a number of ways.
The proposed pro-rata share anti-abuse rule in Prop. Reg. 1.951-1(e)(6) is extremely broad in scope (it applies to any transaction with a principal purpose of avoiding Federal income tax — the avoidance apparently need not be tied to Section 951 at all), and ambiguous in application. Once a transaction is found to be within the scope of the rule, “any transaction or arrangement” related to the plan is “disregarded in determining such United States shareholder’s pro- rata share of the subpart F income of the corporation” — leaving it unclear whether it is only the allocation of a set amount of Subpart F income among identified U.S. shareholders, which can be impacted by the “disregard,” or whether the amount of Subpart F income or identity of U.S. shareholders can also be impacted. In addition, the Proposed GILTI Regs contain no examples to illustrate the intended scope of this anti-abuse rule.
While certainly more targeted than the pro-rata share anti-abuse rule, the specific anti-abuse rules in the Proposed GILTI Regs pose their own concerns. In particular, given the specific statutory authority to write regulations protecting the QBAI regime, the government is being quite aggressive in attempting to disallow basis created during pre-GILTI periods in 2018 for all purposes, and without regard to the purposes of the transactions which created the basis. Furthermore, because both this rule and the ongoing QBAI rule addressing “temporary” acquisition of assets operate on a per-se basis (in the latter case only for assets held for less than 12 months), they not only pose the possibility of sweeping in transactions, which were entered into for entirely valid business purposes, but also may impose a significant record-keeping burden on taxpayers.
Q: Are you surprised that Treasury included “a principal purpose” standard for several of the anti-abuse rules in the Proposed GILTI Regs, given general U.S. opposition to similar language in the treaty context for PPT clauses under BEPS Action 6?
A: There’s nothing new about anti-abuse rules containing “a principal purpose” as part of the standard for their invocation. They have been around in Treasury regulations for many years. It is also understandable that the U.S. government appears to be more comfortable with such rules, when the ability to invoke them lies solely with the U.S. government and not with other governments. In addition, in the context of BEPS Action 6, many governments sought to use the principal purposes test (PPT) instead of the mechanical limitation on benefits provisions, which the U.S. generally favors, and not in addition to such provisions. In this context, it is worth noting that the principal purpose rules contained in the Proposed GILTI Regs backstop quite detailed mechanical rules, rather than seeking to be the sole guidance in this area.
These comments represent the views of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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