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A Look Ahead: Eyes Still on TCJA International Guidance

Posted on Dec. 16, 2019

Practitioners may not have to wait long into 2020 for several key pieces of guidance needed to flesh out the Tax Cuts and Jobs Act’s international provisions.

Two years after the passage of the TCJA, the IRS says the law’s provisions will remain the international guidance priority for the fiscal year, occupying most of the agency’s bandwidth. The 2019-2020 priority guidance plan reflects this reality, with only eight non-TCJA general guidance international projects listed that were not already published before the plan’s release.

Treasury has its sights set on a first-quarter release for eagerly anticipated final regs related to the high-tax exception to the global intangible low-taxed income provision.

Proposed GILTI regulations (REG-101828-19) were released in June that would allow for an expanded high-tax exclusion that would apply electively to all tested gross income subject to a minimum rate of effective tax. The guidance would allow domestic shareholders of a controlled foreign corporation to elect to exclude from gross tested income amounts that have been subject to foreign tax at an effective rate that exceeds 90 percent of the U.S. rate.

David Sites of Grant Thornton LLP on a November firm webcast called this upcoming guidance “the highlight” of 2020 guidance, labeling the high-tax exclusion a “pivotal point” for many U.S.-based multinationals.

“A lot of companies pay a substantial amount of tax in CFC jurisdictions, and this could be a big opportunity for companies to change their compliance burdens, to manage their affairs a little bit more,” Sites said. “The flexibility and applicability of the regulations are going to be big.”

Joseph Calianno of BDO USA LLP told Tax Notes that practitioners are very interested to see what changes from the proposed regs to the final regs regarding the high-tax exclusion. Specifically, he referred to the exclusion only being applied prospectively; eligibility being determined on a qualified-business-unit-by-qualified-business-unit basis (as opposed to a CFC-by-CFC basis); and the length of time an election will lock in a taxpayer.

The Huge PTEP Factor

Treasury and the IRS will also be following up on the December 2018 Notice 2019-01, which addresses ordering rules of previously taxed earnings and profits (PTEP) and outlines the maintenance of 16 separate PTEP accounts. Facing a risk of extreme complexity arising from the guidance, Treasury has targeted early 2020 for the follow-up proposed regs.

“That’s going to be a huge factor for clients as they move money around and people start to navigate this new world where you have all this PTEP and stock basis,” Sites said. “I don’t think taxpayers fully grasp what some of those problems are going to be in future years with a mismatch in the basis and earnings to distribute.”

Calianno also said practitioners are eagerly awaiting the PTEP guidance, including on the interplay between basis adjustments under sections 961(c) and 951A when an upper-tier CFC sells a lower-tier CFC. He noted that the notice requested comments on that issue as well as on the application of sections 959 and 961 to partnerships.

“This issue is especially relevant given some of the recent developments relating to the treatment of domestic partnerships and their partners in the final GILTI regulations and the proposed section 958 regulations,” Calianno said, adding that the notice also indicates that Treasury will withdraw the 2006 proposed regs (REG-121509-00). “The 2006 proposed regulations addressed a number of important issues relating to PTEP, including rules relating to consolidated groups. Hopefully, Treasury’s forthcoming guidance will address these issues as well.”

Other Projects

Among other guidance promised to be out by early 2020 are final regs on the foreign-derived intangible income provision and final section 245A regs, the latter of which have been met with significant practitioner ire.

Temporary regs from June (T.D. 9865) aim to curb tax planning by deeming ineligible for the section 245A dividends received deduction the sum of 50 percent of the dividends attributable to earnings and profits from related-party transactions after the measurement date under section 965(a)(2) — during which time the GILTI provision did not apply — and the dividends attributable to E&P during a tax year ending after December 31, 2017, in which the domestic corporation reduces its CFC ownership. Practitioners argue that the regs have overstepped statutory authority and are procedurally invalid.

While practitioners await a follow-up to the temporary regs, Calianno said he is anticipating the more general guidance on section 245A participation exemption not related to the antiabuse provisions, which has yet to be issued.

For Calianno, upcoming guidance on reg. section 1.861-19 is also something to keep an eye on.

“Although the proposed regulations under 1.861-19 provide guidance on cloud transactions, including factors to consider in determining the characterization of the transaction as a service or lease, those proposed regulations do not address the source of income from cloud transactions,” Calianno said. “This is an area [where] many taxpayers and practitioners would like to see additional guidance.”

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