Proposed regs on global intangible low-taxed income may have just been released, but consternation over an antiabuse provision within the guidance has been swift to develop among practitioners.
The September 13 proposed regs (REG-104390-18) are largely unsurprising and dedicated to computational and definitional guidance regarding section 951A, deferring on the contentious issue of expense allocation. However, antiabuse provisions to prevent the avoidance of GILTI also appear in the 157-page regulatory package.
Under section 951A, each U.S. shareholder of a controlled foreign corporation is subject to tax on GILTI, defined as the excess of its pro rata share of tested CFC income over a 10 percent return (reduced by some interest expense incurred by CFCs) on its pro rata share of the depreciable tangible property of each CFC (qualified business asset investment, or QBAI).
While noting that the proposed regs provide much-needed technical guidance, David G. Noren of McDermott Will & Emery said he found the “very aggressive” antiabuse rule that would target non-calendar-year taxpayers not yet subject to GILTI to be the most surprising feature of the rules.
Section 951A(d)(4) gives Treasury the regulatory authority to issue guidance to prevent the avoidance of tax on GILTI, including guidance on the treatment of property either transferred or held temporarily. As such, specified tangible property will be disregarded if acquired with a principal purpose of reducing the GILTI inclusion and held over at least one quarter-end. Property held for less than 12 months is treated as acquired with a principal purpose of reducing the GILTI inclusion, according to the guidance.
To prevent abuse, the proposed regs also disallow a stepped-up basis in specified tangible property transferred between related CFCs during the period before the transferor CFC’s first inclusion year when calculating the transferee CFC’s QBAI. The preamble states that Treasury and the IRS had become aware of these “inappropriate” transactions to reduce GILTI , which could increase QBAI or reduce the transferee CFC’s tested income or increase its tested loss.
Noren took exception to the regs’ antiabuse provision under prop. reg. section 1.951A-3(h)(2), as applied to intangible property, which would deny the benefit of amortization deductions in later years arising from current-year transactions, regardless of whether the transaction was motivated by tax avoidance.
“It is not clear that there is any basis in the statute or legislative history for treating these transactions as per se abusive and disregarding their effects for purposes of computing GILTI,” Noren said.
Michael DiFronzo of PwC told Tax Notes that he was also surprised by the harshness of the antiabuse rule, noting that it would likely catch some benign transactions in addition to abusive ones. However, he noted that the per se rule would be easier for Treasury and the IRS to administer.
DiFronzo also noted that the approach taken in the proposed regs is consistent with the approach taken by Treasury in other reg packages involving provisions introduced by the Tax Cuts and Jobs Act (P.L. 115-97).
The antiabuse rule in the GILTI proposed regs takes a similar per se approach to the antiabuse rule in the proposed regs for section 965 (REG-104226-18). However, DiFronzo noted that the harshness of the rule is surprising given that Treasury’s authority to issue antiabuse rules appears to be less broad than the authority granted under section 965(o).
“In [section] 965 there was a very expansive antiabuse rule that was written. It was written under broad authority in [section] 965(o), and what it included was the principal purpose test, but they then had a whole list of per se [items] — these are bad, regardless of whether or not they’re done for a principal purpose,” DiFronzo said. “They took the same approach here. Now, what I think is interesting is they don’t have a [section] 965(o) provision in GILTI. They certainly have the ability to write these antiabuse rules, but it’s not as broad. And they did go with what seems to be fairly characterized as a per se rule.”
‘Donut Hole’ Planning
Nicolaus McBee, a senior director with Alvarez & Marsal Taxand, said he was not surprised by the antiabuse rule. McBee said “donut hole” planning has been one of the worst-kept secrets in international tax planning since the TCJA was enacted.
Donut hole planning involved transactions between CFCs that took advantage of timing issues in the statute and allowed U.S.-based multinationals to increase or step up the tangible asset bases in their CFCs without creating earnings and profits for toll charge purposes or creating GILTI. “Many taxpayers were using those types of transactions to increase or step up the tangible asset basis in their CFCs, which down the road would reduce the GILTI pickup via QBAI,” McBee said.
He added that he believes Treasury was well within its authority to issue regulations quashing such planning techniques. “And so I was not surprised that that particular transaction was shut down. And I have to say, I believe the mechanism that they used to do it, I think they are authorized. They were granted some pretty wide latitude as far as drafting antiabuse regulations [goes],” McBee said.