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Oil and Gas Trade Group Addresses 5 Issues With BEAT Regs

FEB. 18, 2019

Oil and Gas Trade Group Addresses 5 Issues With BEAT Regs

DATED FEB. 18, 2019
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February 18, 2019

CC:PA:LPD:PR (REG-104259-18)
Internal Revenue Service
Room 5203
Post Office Box 7604
Ben Franklin Station
Washington, DC 20044

To Whom It May Concern:

On behalf of the American Petroleum Institute (“API”) and its members I am submitting the attached comments pertaining to the Department of Treasury and Internal Revenue Service's (“Treasury and the IRS”) proposed regulations concerning the “Base Erosion and Anti-Abuse Tax.” The Tax Cuts and Jobs Act (“TCJA”) recognized certain taxpayers undertook practices resulting in base erosion. The Base Erosion and Anti-Abuse Tax (“BEAT”) sought to counter these practices.

There are several issues contained in Treasury and the IRS' proposed regulations which API and its members would like to address. First, Treasury and the IRS should issue guidance that related party hedging payments which act to reduce gross income are not base erosion payments (“BEPs”). Second, any depreciable or amortizable property acquired by a domestic corporation from a foreign related party in a liquidation described in section 332 should not give rise to BEPs. Third, API and its members support Treasury and the IRS' decision to allow the cost portion of services cost method qualifying payments to be excluded from the definition of BEPs. This decision should be included in the final regulations. Fourth, API and its members support Treasury and the IRS' decision to calculate the base erosion percentage based upon the year the net operating loss (“NOL”) arose and to apply a base erosion percentage of zero percent for NOLs incurred prior to the TCJA. These decisions should be included in the final regulations. Fifth, fiscal year taxpayers should not be subjected to a BEAT tax rate greater than the statutory five percent.

We welcome the opportunity to discuss these comments at your convenience. You can reach me at (202) 682-8455 or at comstocks@api.org.

Sincerely,

Stephen Comstock
Director — Tax & Accounting Policy
American Petroleum Institute
Washington, DC


API Comments — § 59A

Issue: Treasury and the IRS are requested to provide clarity regarding the application of section 59A to certain related party hedging payments in the final section 59A regulations.

Code Sections and Regulation Sections: Internal Revenue Code Sections 59A(c)(2) and 59A(d)(1)

Requested Action: Treasury and the IRS should issue regulatory guidance confirming that related party hedging payments, which act to reduce gross income (whether by inclusion as an element in calculating costs-of-goods sold (“COGS”) or as a reduction in gross receipts), are not BEPs.

Discussion:

See Attached Exhibit A

Issue: Treasury and the IRS define a base erosion payment to include amounts paid or accrued using any form of consideration including cash, property, stock of the assumption of a liability. Treating stock cancelled or redeemed in connection with a section 332 liquidation as a constructive payment of such stock is overly broad and not within the legislative history or policy of section 59A.

Code Sections and Regulation Sections: Internal Revenue Code Sections 59A(d) and 332; Proposed Treasury Regulation Section 1.59A-3(b)(2)(i)

Requested Action: Proposed Treasury Regulation Section 1.59A-3(b)(2)(i) should be amended to provide that any depreciable or amortizable property acquired by a domestic corporation from a foreign related party in a liquidation described in section 332 does not give rise to a base erosion payment for purposes of section 59A.

Discussion:

1. Summary of Proposal

Treasury and the IRS should provide that any depreciable or amortizable property acquired by a domestic corporation as part of a liquidation described under section 332 does not give rise to a base erosion payment for purposes of the BEAT.

2. Background

Proposed Treasury Regulation Section 1.59A-3(b)(2)(i) provides that for purposes of defining base erosion payment, “an amount paid or accrued includes an amount paid or accrued using any form of consideration, including cash, property, stock, or the assumption of a liability.” The Preamble to these proposed regulations indicates that whether a non-cash payment or accrual incurred by a taxpayer in a transaction constitutes a base erosion payment is determined without regard to whether the transaction otherwise qualifies for nonrecognition treatment under other provisions of the Code, such as section 351, 332, or 368. Therefore, if a U.S. parent corporation (“USP”) receives depreciable or amortizable property from a wholly-owned foreign corporate subsidiary (“CFC”) in a transaction that qualifies as a section 332 liquidation of the CFC, the USP (distributee) would be treated as making a base erosion payment to the CFC (distributor) in the form of the CFC stock.

Treating stock cancelled or redeemed in connection with a section 332 liquidation as a constructive payment of such stock to the liquidating corporation is overbroad given the legislative history and underlying policy of section 59A. Particularly in the context of a liquidating distribution resulting from a “check the box” election under Treasury Regulation Section 301.7701-3(c)(1)(i), the distributee corporation makes no payment to the distributor corporation either in form or in substance.1 The disappearance of the distributor stock held by the distributee corporation in a complete liquidation pursuant to section 332 is properly characterized as a redemption or cancellation of such stock rather than as a payment of such stock from the distributee corporation to the distributor corporation.2

The Preamble draws a distinction between a section 301 distribution and a section 332 distribution on the basis that in an in-kind section 301 distribution, “there is no consideration provided by the taxpayer to the foreign related party in exchange for the property.” As discussed above, in a section 332 liquidation, no payment is made by the distributee corporation to the distributor corporation either in form or in substance. Moreover, the difference in base erosion effects is minimal between an in-kind section 301 distribution of depreciable or amortizable property and a section 332 liquidating distribution of a corporation with depreciable or amortizable property. As a result, distributions of property with respect to section 332 liquidations should be treated in the same manner as section 301 distributions and should not give rise to base erosion payments for section 59A purposes.

3. Proposed Solution

Proposed Treasury Regulation Section 1.59A-3(b)(2)(i) should be amended to provide that any depreciable or amortizable property acquired by a domestic corporation from a foreign related party in a liquidation described in section 332 does not give rise to a base erosion payment for purposes of section 59A.

“For purposes of paragraph (b)(1) of this section, an amount paid or accrued includes an amount paid or accrued using any form of consideration, including cash, property, stock, or the assumption of a liability. For purposes of this paragraph, if a domestic corporation acquires depreciable or amortizable property from a foreign related party in a liquidation described in section 332, the domestic corporation is not treated as paying or accruing an amount to the foreign related party for such property.”

Issue: Proposed Treasury Regulation section 1.59A-3(b)(3)(i) allows for the exclusion of the cost portion of services cost method (“SCM”) qualifying payments from the definition of a BEP. This treatment is appropriate and should be retained in the final regulations.

Code Sections and Regulation Sections: Internal Revenue Code Sections 59A(d)(5) and 482; Proposed Treasury Regulation Section 1.59A-3(b)(3)(i); Treasury Regulation Section 1.482-9(b)

Requested Action: Treasury and the IRS should retain its SCM exception to the definition of base erosion payments.

Discussion:

1. Summary of Proposal

Treasury and the IRS should retain its SCM exception to the definition of a BEP. Only including the markup portion of a payment eligible for the SCM as a BEP is a reasonable interpretation of the statutory language.

2. Background

The BEAT broadly defines a base erosion payment to include any amounts paid or accrued to a foreign person which is a related party of the taxpayer with respect to which a deduction is permitted. Sections 59A(d)(5)(A-B) creates an exception for certain payments meeting the SCM requirements of section 482. Proposed Treasury Regulation Section 1.59A-3(b)(3)(i) provides that the SCM exception is available to taxpayers even if there is a markup beyond cost, but that the additional markup will be characterized as a BEP. Treasury and the IRS requested comments on whether the regulations should adopt an alternative position whereby the SCM exception is unavailable to any payments including a markup component.

3. Requested Action

Treasury and the IRS should retain the position in Proposed Treasury Regulation Section 1.59A-3(b)(3)(i). As stated in the preamble, foreign jurisdictions often require a markup be charged in addition to the base cost of service payments. If all service payments which include markups were automatically ineligible for the SCM exception, section 59A(d)(5)(A) would be rendered null. The legislative history of the TCJA does not indicate a clear intent to prohibit any payment with a markup to be excluded from the SCM exception to the definition of BEPs.3 Therefore, Treasury and the IRS' interpretation that only the markup is characterized as a BEP is a reasonable interpretation of the statute.

Issue: Treasury and the IRS should retain its determination of the base erosion percentage to be applied to NOLs, including the decision to apply a base erosion percentage of zero percent to pre-TCJA NOLs.

Code Sections and Regulation Sections: Internal Revenue Code Section 59A; Proposed Treasury Regulation Section 1.59A-4(b)(2)(ii)

Requested Action: Finalize Proposed Treasury Regulation Section 1.59A-4(b)(2)(ii) in its current form.

Discussion:

1. Background

For purposes of computing the base erosion percentage of any NOL deduction that is added back to taxable income, the base erosion percentage for the tax year that the NOL arose, rather than the base erosion percentage for the year the NOL is utilized, would be the percentage applied. In addition, for an NOL that arose in a tax year beginning before January 1, 2018, the base erosion percentage applied for that tax year would be zero. API commends Treasury and the IRS for concluding that the base erosion percentage is based on the year in which the NOL arose as this is the only way to ensure the rule achieves a rational result. Furthermore, treating the BEAT add-back for pre-TCJA losses into a post-TCJA year as zero is consistent with the statute and legislative record. Because the BEAT applies only to “base erosion payments” that are “paid or accrued” in taxable years beginning after 2017, the BEAT should not apply to base erosion payments that were paid or accrued in taxable years beginning prior to 2018, even if they resulted in an NOL carryforward. As a result, there is no add-back to modified taxable income for the use of those pre-2018 net operating loss carryovers. This result is appropriate and necessary to conform to the statute's effective date.

2. Requested Action

API supports finalizing the rules in Proposed Treasury Regulations Section 1.59A-4(b)(2)(ii) in their current form.

Issue: Fiscal year taxpayers may be subjected to a first-year BEAT rate greater than the statutorily mandated 5% rate.

Code Sections and Regulation Sections: Internal Revenue Code Section 15; Internal Revenue Code Section 59A(b)(1)(A); Proposed Treasury Regulation Section 1.59A-5(c)(iii)(3)

Requested Action: Eliminate the requirement section 15 be applied to first-year fiscal tax-year BEAT payers.

Discussion:

1. Summary of Proposal

Treasury and the IRS should eliminate the requirement section 15 be applied to a first-year fiscal year taxpayer for purposes of the BEAT. Rather, the tax rate for first-year fiscal year taxpayers should be the statutorily mandated 5 percent under section 59A(b)(1)(A).

2. Background

In general, the BEAT is a minimum tax with deductible payments to foreign related parties as a disallowed preference item. While the BEAT rate is generally 10 percent, Congress implemented a 5 percent rate for the first-year post-tax reform. Section 59A(b)(1)(A) specifically states that the BEAT tax rate is “equal to 10 percent (5 percent in the case of taxable years beginning in calendar year 2018) of the modified taxable income of such taxpayer for the taxable year . . .”

However, Treasury's proposed rule for BEAT applies section 15 to the BEAT rate for fiscal year taxpayers. Section 15 states that a blended tax rate will be applied to taxable income for the full fiscal year based on the tax rates in effect for the proportional number of days included in the fiscal year before and after the effective date of the rate change. For fiscal year taxpayer this means, despite the section 59A(b)(1)(A) statutory language, that the BEAT rate will be higher than 5 percent in the fiscal year beginning in calendar year 2018.

3. Proposed Solution

Treasury and the IRS should eliminate the requirement section 15 be applied to a first-year fiscal year taxpayer for the BEAT. The statutory 5 percent tax rate should be applied to be both calendar year and fiscal year taxpayers.

FOOTNOTES

1Moreover, the distributee corporation is not deemed to make a constructive payment to the distributor corporation in the form of stock for purposes of applying other Code provisions.

2See Treas. Reg. § 1.332-2(c) (“To constitute a distribution in complete liquidation within the meaning of section 332, the distribution must be (1) made by the liquidating corporation in complete cancellation or redemption of all of its stock in accordance with a plan of liquidation . . .”). Although there is language in these regulations describing the amounts received by the distributee corporation as in “full payment in exchange for such stock,” that language does not state that the distributor corporation is treated as having received a payment of its own stock from the distributee corporation. See Treas. Reg. § 1.332-1(a).

3Joint Committee on Taxation, General Explanation of Public Law No. 115-97 (JCT-1-18), December 2018 at 401.

END FOOTNOTES

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