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US Tax Reform

RSM’s Ramon Camacho and Ayana Martinez on U.S. TCJA Implications

Robert Sledz  

Robert Sledz  

Ramon Camacho is an international tax principal in RSM’s Washington National Tax office. He advises clients on a host of international tax and capital markets issues, including tax planning and compliance, due diligence and documentation initiatives, restructurings, and tax controversy (including tax shelters). Prior to joining RSM in 2012, Ramon spent almost 20 years serving clients from the national offices of large accounting firms and a large law firm. Most recently, he was the technical tax leader for international and cross-border financial matters at Andersen Tax, LLC. Prior to his work at Andersen Tax, Ramon was responsible for the international tax practice at Pillsbury Winthrop Shaw Pittman LLP, and served clients as part of the Washington National Tax Office of PricewaterhouseCoopers LLP (PwC). Ramon began his career as an attorney-advisor in the Internal Revenue Service (IRS) Office of Chief Counsel (International), where he wrote regulations and rulings, and advised on litigation and tax policy matters.

Ayana Martinez has over fifteen years of tax experience, including in tax consulting, compliance, and controversy. She is a member of RSM’s international tax group, concentrating her practice on domestic and cross-border transactions involving complex international tax issues. Ayana has advised public and private businesses on issues concerning transfer pricing, foreign tax credit (FTC) planning, foreign entity formation and classification matters, ASC 740 Review, international tax compliance, income tax structuring for outbound and inbound business startups, and controlled foreign corporation (CFC)/subpart F planning. Her clients include government contractors, service providers, financial institutions, and technology companies. Prior to joining RSM, Ayana worked in a Big Four’s international tax practice.  Ayana currently serves at the firm’s international tax lead for TCJA.

Mr. Camacho and Ms. Martinez answered the following questions for BEPS Global Currents on May 25, 2018 regarding the U.S. Tax Cuts and Jobs Act (TCJA) and the OECD’s BEPS project:

Q: In general, how are your clients responding to the TCJA?

A: Our clients initially focused on items that affect their 2017 tax returns, such as the Section 965 transition tax. Going forward, our clients that have flow-through entities will evaluate their tax structures, taking into consideration reduced U.S. corporate tax rates.

The TCJA provides an opportunity to review current tax structures, and model out new structures, especially for clients that have quarterly reporting requirements. There are also estate planning considerations involved for individuals in partnerships. This high-level modeling and analysis may take place ahead of potential TCJA guidance from the IRS.

Our clients are also considering the potential impact that global intangible low-taxed income (GILTI) will have on their financial reporting requirements.

Q: Are your clients considering “checking the box” as a result of the TCJA?

A: Not a universal answer, as each client situation is unique. We are modeling out different scenarios, while considering relevant tax and legal implications.

Some clients are considering injecting a C-Corp above their CFCs, where they currently have a flow-through structure (e.g., partnership), to take advantage of the new 100% dividends-received deduction (DRD), Section 250 deduction for GILTI inclusions and the 21% corporate tax rate.

Q: How are you generally calculating the cost of goods sold (COGS) under BEAT? 

A: Not a lot of flexibility in the COGS definition. Some of our large clients believe that they may not meet the base erosion and anti-abuse tax (BEAT) threshold. Only one out of about 10 client calls we receive relates to this exception. Instead, most clients are focused on changing their transactional flows to comply with the BEAT rules.

Q: Do you have clients with foreign intellectual property (IP) that are considering moving this IP to the U.S.?

A: Some clients with IP offshore must keep it offshore due to foreign regulatory requirements. Clients transferring IP should consider exit taxes that would be imposed by foreign tax authorities. We are working with our foreign offices to determine whether clients could be subject to this tax.

There is a GILTI impact here as well, so it’s a very factual issue for us to evaluate. GILTI can make the question of where to place IP somewhat moot.

Onshoring IP to the U.S. can be expensive, so it is not a simple process. The GILTI rules may cause clients to keep IP offshore, depending on the foreign tax rate. Middle-market clients are not as willing to move their IP around. We see more planning opportunities for clients that have a blank piece of paper transaction wise. Clients are reluctant to incur costs (e.g., lawyer’s fees) from moving IP, unless there is a substantial tax savings.

Q: Which BEPS action items will have the most impact on your clients following U.S. tax reform? 

A: The OECD BEPS recommendations are not binding. The bigger question is how the World Trade Organization (WTO) will categorize foreign-derived intangible income (FDII) (e.g., prohibitive subsidy).

Also, the IRS intends to share country-by-country (CbC) reporting data with individual U.S. states, leading to potential state audits down the road. CbC report information will likely be public within the next 20 years. Blockchain technology will allow tax authorities to view corporate information in real time in the future. 

Some of the BEPS action items relevant for our clients include the potential expansion of permanent establishment (PE) rules under Action 7. Most TCJA rules are consistent with the BEPS recommendations (i.e., neutralizing hybrid mismatches, anti-deferral of CFC income, and the interest expense limitation).

Q: What are some of the challenges you see with clients in complying with the Section 965 transition tax? 

A: Documentation is a challenge, as clients may not have adequate records, including around their tax pools. Gathering E&P information is another challenge, especially when trying to determine how many years to go back for Section 965inclusion purposes. Current Section 965 IRS guidance will impact the timing of filing U.S. tax returns.

A big issue we see is how to calculate the net investment income tax (NIIT), which is an additional tax on individuals, imposed by Section 1411. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. A partnership subject to the Section 965 inclusion may also be subject to the NIIT. One question that arises is the deduction allowed under Section 965(c) also applies to compute the NIIT tax base (U.S. shareholder of a CFC can deduct an amount for the taxable year, in which an amount is included in its gross income under Section 965, sufficient to achieve a net rate of 15.5% for cash and cash equivalents and 8% for other amounts of deferred offshore income). 

Q: What issues are you seeing with the new FTC baskets? 

A: Tax credits that were sitting in the general FTC basket may now fall into the foreign branch basket, where there generally is no allocated income. As a result, taxpayer credits may expire. U.S. financial statements must reflect the changes of credits, whether written off or valued down, until the IRS issues additional guidance. We see issues where client have credits in their general basket but income now is going in the branch basket.  However, the credits in the general basket might not get utilized and clients may have to write them off, or set up a valuation allowance. There is no current IRS guidance on the issue, but we expect Treasury to issue transition rules at some point. Clients may not be aware of the changes to FTC basket rules under the TCJA.

© 2018 RSM US LLP. All rights reserved.

These comments represent the views of the authors only, and do not necessarily represent the views or professional advice of RSM US 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. 

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party.

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