When I was young and naïve, I overheard a seasoned practitioner remark: “If tax provisions are fun…then dealing with the international pieces of the provision is the most fun you can have.” I’m now neither young nor naïve and I recognize the sarcasm in the remark. However, I do believe the issues are interesting and, if tackled with the appropriate mindset, might even rise to the level of “fun”.
Let’s review a few such entertaining issues impacting the international components of the provision:
“APB 23.” Absent a representation under ASC topics 740 and 942 (“APB 23”) that foreign earnings are permanently reinvested, companies are required to provide a deferred tax liability when outside ownership interest basis is lower for tax than it is for books for certain foreign operations. A proper APB 23 assertion avoids this deferred tax liability, often resulting in a lower overall effective tax rate.
In today’s sluggish global economy, companies may find it more difficult to demonstrate that foreign earnings are not needed in the US to meet current cash demands. Common concerns include debt service requirements and covenants. Care should be taken to document global cash sources and uses as this area continues to be a focus for external auditors and financial statement regulators.
IRC Section 6501(c)(8). Recent changes to section 6501(c)(8) have raised the stakes regarding foreign information reporting. Improper or incomplete Forms 5471, 8865, 8858 and 926 create a situation where the statute of limitations for the entire US Federal return does not run until deficiencies are corrected. Imagine concluding that the statute of limitations has not expired when it should have for uncertain tax positions because a Form 5471 was omitted from the return?
Permanent Establishment Risk. Do your employees travel? Do you know what they do when they step off the plane in a country other than the one where they are employed? Without answers to these questions, you may be unable to assess whether activities outside the country of employment create tax risk for the employer.
Consider the UK-based sales executive whose territory includes portions of Western Europe and North Africa. This activity may subject the UK company to income tax in other countries. As the global, mobile workforce becomes the “new normal,” managing tax risk becomes more challenging. Dealing with it on an ad hoc basis is like playing Whac-a-Mole; as soon as you address one issue, another pops up. A uniform approach, where mobile employees operate off a standard playbook, can manage operations in line with tax planning, avoid surprise tax obligations, and support proper compliance filings.
Lapse of the Subpart F Look-Through Rules. Subpart F is fun. Earn it and certain US shareholders include it in US taxable income without receiving a cash distribution from the foreign operation. A common type of Subpart F income is Foreign Personal Holding Company income (“FPHCI”) – – passive income earned by a controlled foreign corporation. An expired provision in, section 954(c)(6) excluded certain passive flows between related controlled foreign corporations from the definition of FPHCI. This allowed multinational groups to manage cash on a global basis without a Subpart F inclusion. Today, companies need to review related party transactions to uncover potential Subpart F inclusions associated with the sunset of section 954(c)(6). Not only could this impact the effective tax rate, but it might also change a position regarding an APB 23 assertion.
See. Wasn’t that fun? Keep your head down and your pencil moving.