Even before COVID-19 came along, tax professionals were wrestling with the unintended consequences of the 2017 Tax Cuts and Jobs Act (TCJA), and trying to understand the full implications lurking in the many updates, corrections, and clarifications issued by the IRS and Treasury at the end of 2019.
As if that weren’t enough, corporate tax advisers are now hastily trying to determine how provisions in the $2.2 trillion Coronavirus Aid, Relieve, and Economic Security (CARES) Act and subsequent stimulus bills might impact them. For example, the CARES Act introduced temporary changes in the rules for Net Operating Loss (NOL) carrybacks, expanded business-interest expense deductions, and alternative minimum tax (AMT) refunds offer corporate taxpayers several mechanisms for accessing liquidity—but careful analysis by individual companies will be necessary to decide if and how to take advantage of those provisions.
In order to answer some of the questions currently facing tax professionals, TEI and Thomson Reuters recently sponsored a roundtable discussion of tax experts from Baker & Mackenzie LLP, Eversheds Sutherland (US) LLP, and Pepper Hamilton LLP—all of whom have been grappling with the ambiguities and inconsistencies of the TCJA on a daily basis. Captured in a webinar entitled “2019 Year-End Corporate Tax Roundup,” the discussion covered taxation trends and provisions at the state, federal, and international level, but focused on legislative uncertainties and applications of the existing code that tax professionals serving corporate clients should be aware of.
GILTI and 163(J)
For example, most of the TCJA-related guidance thus far has been devoted to clarifying international regulations for calculating BEAT, GILTI, FDII and other provisions of the law that apply to multinationals, while guidance at the federal and state level has lagged. In the webinar, Todd Lard, a partner at Eversheds Sutherland LLP, explained that some federal and state guidance has been forthcoming, but not enough. Many states are still trying to decide whether and how to pick up some form of GILTI (Global Intangible Low-Taxed Income), for instance, and how to apply rules related to IRC Section 965 (Transition Tax) and Section 163(j) (Business Interest Expense Limitations and Pass-Through Entities).
For states, Lard explained, “The essential question is should they include GILTI, and if so, how should they do that?” State tax systems aren’t typically set up to handle international income, he said, and even doing so can raise constitutional questions about taxing foreign dividends differently from domestic dividends. The country is currently split on the issue:24 states have currently chosen to take up GILTI—with New York and New Jersey leading the way—but the rest either have not decided, or have formally decoupled from both GILTI and965.
Lard said he hopes the IRS will issue some guidance for states on GILTI later in 2020, but until then he expects “a lot of activity amending 2018 returns,” because “we’re just struggling trying to figure out what we should have done right in 2018.”
At the federal level, one of the proposed regulatory changes on everyone’s radar is the IRS’s attempt to simplify the determination of built-in gains and losses under Section 382(h). Section 382 pertains to rules for computing recognized built-in gains (RBIG), net unrealized built-in gains (NUBIG) and net unrealized built-in losses (NUBIL) for companies that undergo more than a 50-percent ownership change and want to carry over their net operating losses (NOL) as a tax deduction.
When the TCJA was passed in 2017, there was some confusion about how to calculate and apply 382 limitations on these deductions, so the IRS issued two alternative “safe harbor” approaches for calculating these deductions: the so-called “338 approach,” and the “1374 approach.” The key difference is that using the 338 approach, loss companies can calculate their built-in items (income, gain, deduction, loss) by comparing them against a hypothetical purchase of all their stock on the ownership change date—a calculation that turns out to be quite beneficial to many large corporations. Under the IRS’s proposed 382(h) regulatory changes, however, the 338 approach would be eliminated, and the 1374 approach would be standardized across the board.
This change has significant implications for large multinationals, said Todd Reinstein, a partner in the tax practice group at Pepper Hamilton LLP. “The uplift you get from the hypothetical amount in section 338 is sometimes hundreds of millions of dollars in some transactions,” Reinstein explained in the webinar. For everything else, the 338 and 1374 approaches arrive at basically the same answers, he said, “but this deemed amortization that you get under the 338 approach is what was so important to taxpayers.
If ratified, the proposed regulations are prospective and would apply to built-in determinations for 382 ownership changes after the date the regulations are adopted and finalized.
In December 2019, the IRS and Treasury released 343 pages of final regulations and 59 pages of proposed regulations related to the TCJA’s base erosion and anti-abuse tax (BEAT), so anything close to a thorough examination of these changes is beyond the scope of this paper. But companies with global operations should be aware that, among other things, the new regulations do codify the application of general US. tax principles when determining base-erosion payments.
The BEAT only applies to large multinational enterprises with gross receipts of more than $500 million (averaged over three years), and is intended to prevent companies from shifting profits to affiliates in lower-tax countries. In general, however, the final regulations provide additional guidance for calculating BEAT liability and clarify in specific detail how to apply BEAT (section 59a) to corporate transactions in various situations. Most of the proposed regulations offer guidance related to unresolved questions that have heretofore been in limbo since the BEAT was implemented in 2017.
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