The Office of Information and Regulatory Affairs' regulatory review continues to exhibit a light touch for substantive changes, this time related to the global intangible low-taxed income provision, the participation exemption, and the passthrough deduction.
Tax Notes recently obtained five sets of draft regs received by OIRA before they went through the regulatory review process implemented by the April 2018 memorandum of agreement between the Office of Management and Budget and Treasury. Tax Notes has created redline versions of the regs comparing the drafts with the publicly released versions to see what changed during the final stages of review. The batch includes:
temporary regs containing the antiabuse rule for the section 245A dividends received deduction (T.D. 9865);
proposed regs on the section 245A dividends received deduction (REG-106282-18);
proposed GILTI regs on the high-tax exception (REG-101828-19);
final GILTI regs (T.D. 9866); and
proposed 199A regs for cooperatives (REG-118425-18)
Like previously obtained draft regs, changes from the OIRA review process appear to be focused on the preambles, including added detail.
GILTI Changes
In the final GILTI regs, the government made changes in defining qualified business asset investment when distinguishing between depreciable tangible property and nondepreciable tangible property. The publicly released finalized regs include a more detailed passage on precious metals that are partially deductible.
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 (QBAI).
The regs also changed between draft and final version in response to comments arguing that inclusion of interest expense of a tested loss CFC along with exclusion of QBAI of a tested loss CFC was unfair. In declining to adopt any changes to exclude interest expense of a tested loss CFC, and citing the statute itself as it had previously, the publicly released version also cites a footnote from the conference report for support.
Many of the final GILTI reg changes appear to be focused on the special analyses section of the preamble. Missing from the draft version was the section exempting the guidance from the Congressional Review Act, which would delay the effective date of a major rule until 60 days after it is published in the Federal Register. The final preamble explains that the delay would be “unnecessary and contrary to the public interest.”
The economic analyses section also changed for the proposed GILTI regs, which provide for an expanded high-tax exclusion that would apply on an elective basis to all tested gross income subject to a minimum rate of effective tax. In the draft version, Treasury and the IRS asked for comments on “data, evidence, or models that would enhance the rigor” in quantifying the economic effects of the rules. That language was deleted from the released version.
Good Cause
The GILTI guidance, as well as the section 245A guidance, also lacks references to “non-revenue” from the draft regs when examining the economic effects in the special analyses section.
Temporary regs relating to section 245A and the dividends received deduction saw a substantial redrafting of the good cause exception allowing for the issuance of immediately effective guidance, although the underlying arguments were mostly unchanged.
For the first time in a tax preamble, the section 245A temporary regs use a good cause statement to dispense with the notice and comment period typically required under the Administrative Procedure Act.
In promulgating the antiabuse rules, Treasury and the IRS identified a gap between when GILTI applies and when section 245A applies, with the participation exemption applying after January 1, 2018, and GILTI not applying until after the first year ending after December 31, 2017.
In addition to a notice providing taxpayers the opportunity to engage in abusive transactions, the publicly released version adds an explanation that a delayed effective date would have “a significant deleterious effect upon the parties to which the regulation applies.” Further, the regs are short term and provide an opportunity for comment before finalized. Finally, they are required to be issued by a statutory deadline 18 months after enactment of the Tax Cuts and Jobs Act to ensure retroactivity, the released preamble explains.
Farming Cooperative Changes
A comparison between what was sent to OIRA and what was ultimately released to the public June 18 on the section 199A farming cooperative regs shows little was changed in the process, aside from explanations of the government’s thinking.
The version released to the public (REG-118425-18) contains a definition of agricultural or horticultural products that excludes intangible property. That definition remained the same, but the government’s reasoning behind that definition was spelled out in the OIRA review process.
Generally, the 20 percent deduction was designed to provide parity with the TCJA’s reduction of the corporate tax rate from 35 percent to 21 percent. The deduction applies to passthrough owners up to specific income thresholds, above which some industries are barred from using the deduction. The barred industries are considered specified service trades or businesses. Those that are eligible to use the deduction are limited by wages paid to employees and basis in property.
The statutory language of section 199A originally encouraged grain sales to agricultural cooperatives instead of independent companies. Congress changed that so-called grain glitch in March 2018 with the Consolidated Appropriations Act of 2018 after businesses complained about the provision.