Forest Products Industry Suggests Change to FDII, GILTI Regs

May 6, 2019

The Honorable David J. Kautter
Assistant Secretary
Department of Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Charles Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

The Honorable William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

RE: Proposed Regulations under Section 250 — Computation of Deductions under Section 163(j), 172(a), and 250(a)

Dear Assistant Secretary Kautter, Commissioner Rettig and Acting Chief Paul:

The American Forest and Paper Association (AF&PA) serves to advance a sustainable U.S pulp, paper, packaging, tissue, and wood products manufacturing industry through fact-based public policy and marketplace advocacy. AF&PA member companies make products essential for everyday life from renewable and recyclable resources and are committed to continuous improvement through the industry's sustainability initiative — Better Practices, Better Planet 2020. AF&PA commends the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) for their excellent work to-date in issuing guidance to implement Public Law 115-97 (2017), the "Tax Cuts and Jobs Act" ("TCJA").

Background

Section 250(a)(2) places a limitation on the amount of section 250 deduction a U.S. shareholder is allowed to use in order to offset its global intangible low-taxed income ("GILTI") and foreign-derived intangible income ("FDII"). By placing a limit on the deduction by reference to "taxable income," prior to the proposed regulations, taxpayers commented on a circularity issue with respect to calculation of the deductions allowed under sections 163(j), 172(a), and 250(a) (all of which are limited by the amount of taxable income of the U.S. shareholder).

The proposed regulations under section 250 prescribe a five-step process to reconcile this circularity:

The preamble to the proposed regulations provides that Treasury and the IRS looked at different ways to calculate each of the three deductions including the use of simultaneous equations.

Recommendation

When finalized, the Proposed Regulations should be modified to provide a transition rule with respect to net operating losses that arose prior to December 31, 2017 such that when these losses are utilized the deduction allowable under section 250 will not be limited.

Discussion

It is clear that the deduction allowed under section 250 cannot increase a current year operating loss. Further, the proposed regulations essentially disallow a section 250 deduction when utilizing an NOL carryforward under section 172(a). In calculating the amount of NOL carryforward to the subsequent taxable years, section 172(b)(2) provides that "Nile entire amount of the net operating loss for any taxable year shall be carried to the earliest of the taxable years to which . . . such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried." Furthermore, the provision clarifies that, for purposes of section 172(b)(2), the "taxable income" for any prior taxable year will be computed with the modifications specified in subsection (d) . . . "and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter. . . ." The modifications described in section 172(d) were amended by the TCJA to include, as new section 172(d)(9), the section 250 deduction. Accordingly, the method provided by section 172(b)(2) for calculating the amount of any NOL that can be carried forward by a taxpayer into a subsequent year requires taxpayers to determine the amount of NOL carried forward by reference to the taxable income of a prior year without regard to the section 250 deduction when combined with the ordering rule provided in the proposed regulations.

Under the transition rule recommended by AF&PA, and the effective date of the statute, the amendments under section 172(b) would apply only to losses arising after December 31, 2017 and would disregard the section 172(d) amendment. Taxpayers are required to look to the rules provided in pre-TCJA section 172(b) when calculating the amount of a loss carryover for a pre-TCJA NOL; however, section 172(b) prior to being amended by the TCJA could never have contemplated calculating taxable income without regard to the section 250 deduction, as the section 250 deduction did not exist until the enactment of the TCJA. As such, a taxpayer should be allowed a deduction under section 250 when utilizing losses that were generated prior to the TCJA.

it is true that the amendments made by the TCJA to paragraph (d) of section 172, which provides that taxable income is calculated without reference to the section 250 deduction, is effective for taxable years beginning after December 31, 2017. However, it is consistent with Congressional policy already enacted to provide a distinction between a pre-TCJA NOL carryover calculation and a post-TCJA NOL carryover calculation in differentiating between pre-TCJA and post-TCJA section 172 attributes. For example, pre-TCJA NOL carryforwards are not subject to the 80 percent limitation that applies to post-TCJA NOL carryforwards. Consequently, AF&PA's position is that there is no policy reason for Treasury and the IRS to prevent pre-TCJA NOL carryforwards from being treated differently than post-TCJA NOL carryforwards pursuant to AF&PA's recommended transition rule as such treatment is consistent with existing Congressional intent.

Authority

Treasury and the IRS have authority under section 250(c) to "prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section."

We appreciate your consideration of our requests. If you have any questions or concerns regarding the comments above, we would be happy to meet with you to discuss them.

Elizabeth Bartheld
Vice President, Government and Industry Affairs
American Forest & Paper Association
Washington, DC