Mining Company Addresses Treatment of NOLs Under BEAT Regs

February 18, 2019

Internal Revenue Service
CC:PA:LPD:PR (REG-104259-18)
Courier's Desk
1111 Constitution Avenue, N.W.
Washington, DC 20224

Re: REG-104259-18 (Proposed Regulations on Base Erosion and Anti-Abuse Tax)

On behalf of Rio Tinto (RIO), the comments below are hereby submitted on the proposed regulations (the Proposed Regulations) issued by the Department of the Treasury (the Treasury Department) and the Internal Revenue Service (IRS) on December 13, 2018 that implement the base erosion and anti-abuse tax (BEAT) under section 59A¹.

RIO is a global mining company operating in 35 countries and we are particularly proud to have been operating in the United States for over 100 years. Rio Tinto has significant employment in Utah, Arizona, California and Illinois, and 30 percent of our shares are held by US shareholders.

Our comments address the treatment of net operating losses (NOLs) that arose prior to the enactment of the Tax Cuts and Jobs Act (TCJA) on the calculation of modified taxable income. While we appreciate Treasury recognizing that pre-enactment NOLs should not impact the base erosion percentage when carried over and taken into account after the enactment of the TCJA, pre-enactment NOLs are not permitted to reduce modified taxable income below zero. As discussed below, this proposed rule has the effect of denying taxpayers like RIO the economic benefits of NOLs incurred prior to the TCJA.

Background to the usage of pre-2018 NOLs

Prior to the TCJA, under section 172, a taxpayer that is taking a deduction for NOLs incurred in prior years computes taxable income by including all net operating loss carryforwards as a deduction against net taxable income. Importantly, for NOLs incurred in years prior to the TCJA (pre-2018 NOLs), a taxpayer may reduce current year tax liability to zero. This treatment was recognized and protected under the TCJA for pre-2018 NOLs. In contrast, we recognize and respect the change in rules for NOLs generated in the future. NOLs generated post 2017 can offset only up to 80% of current year taxable income.

Under section 59A, the computation of modified taxable income (MTI) requires an add-back of the applicable base erosion percentage of the NOL deduction taken in the current year.² The proposed regulations acknowledge an NOL that arose in a taxable year beginning before January 1, 2018 has a base erosion percentage for the taxable year of zero. This is consistent with the intent to avoid having a retroactive impact of TCJA changes.

In summary, Treasury has issued proposed regulations that provide that net operating loss carryforwards arising from years before the effective date of section 59A have an associated base erosion percentage of zero. This is appropriate and consistent with good policy and legislative practice to avoid ex post facto legislation. However, the proposed regulations do not allow pre-2018 NOLs to offset the full tax liability of a taxpayer as was previously allowed (in this case since MTI cannot be fully offset by pre-2018 NOLs).

This separate rule under the proposed regulations causes both a potentially unfavorable asymmetry and an ex post facto issue. This is due to the fact that under the proposed regulations, NOLs incurred in years prior to the TCJA (pre-2018 NOLs) would not, as originally allowed, economically eliminate up to the full tax liability through carryforward allowances and as originally allowed under the applicable law when such losses were sustained.

Reason for change to the usage of pre-2018 NOLs for MTI

The proposed regulations provide that, to prevent NOLs from being double counted in the MTI computation, if a taxpayer utilizes a net operating loss deduction in a year where section 59A applies, then only the amount of net operating loss deduction used to reduce positive taxable income to zero is taken into account.³ While a taxpayer who incurs normal business losses in a current year may start at negative income in computing MTI, a taxpayer with current year positive income but net operating loss carryovers in excess of that current year income starts at zero, even if the total net operating loss carryforwards would have reduced net income to less than zero.⁴

Treasury has indicated that this MTI floor approach is necessitated by the broader determination to use an "add-back" method of computing MTI rather than a "recomputation" method. Treasury has indicated that the add-back method of computing MTI has been chosen as "simpler and more administrable than the recomputation method, but has also requested comments with respect to the add-back method and any alternative methods for determining MTI. We appreciate Treasury's request for comments in this area.

The imposition of the MTI floor under the add-back method is fundamentally unfair to taxpayers who have pre-2018 NOLs. Pre-2018 NOLs represent economic losses incurred in a period before the conception of section 59A and any rule that distorts the tax treatment of those pre-2018 NOLs (compared to both post-BEAT NOLs and post-BEAT current year losses) with respect to section 59A is essentially unfair and is, arguably, retroactive in nature.

There is an alternative approach, which would accomplish the desire to 1) avoid NOLs from being double counted 2) keep NOL tracking simple, and 3) avoid what is arguably an ex post facto outcome.

Recommendation for change

Treasury has indicated a desire not to adopt a full recomputation approach for simplicity purposes. We applaud Treasury's desire to keep tax compliance and administration as simple but as fair as possible.

We propose an alternative solution to the proposed regulations for how to treat pre-2018 NOLs in the computation of MTI. Under this alternative, a company would track pre-2018 NOLs (and pre-2018 NOLs only) in two separate tranches 1) a regular taxable income tranche and 2) an MTI tranche. The regular taxable income NOL tranche could be simply tracked through utilization against regular taxable income. Similarly, the MTI tranche could be simply tracked through utilization against MTI. The starting point for both tranches would be the pre-2018 NOLs. This proposal does not impact rules associated with NOLs generated in post 2017 years.

We believe this alternative proposal is both simple and fair. Moreover, this alternative proposal is consistent with Congressional intent to maintain economic benefits of pre-2018 NOLs and removes concerns associated with negative ex post facto outcomes.

We appreciate your consideration of these comments. Please contact Mike Gardner, U.S. Tax Leader for Rio Tinto by email at Michael.Gardner@riotinto.com if you have any questions regarding this submission.

Michael Gardner
U.S. Tax Leader for Rio Tinto
South Jordan, UT