Chemistry Council’s Suggestions Aimed at Improving FTC Regs

CC:PA:LPD:PR
(REG-105600-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20224

Re: Comments on REG-105600-18

Dear Sir or Madam:

The American Chemistry Council (ACC) represents the leading companies engaged in the business of chemistry. ACC member companies apply the science of chemistry to create and manufacture innovative products that make people's lives better, healthier, and safer. The business of chemistry is a $526 billion enterprise and a key element of the nation's economy. Over 25% of U.S. GDP is generated from industries that rely on chemistry, ranging from agriculture to oil and gas production, from semiconductors and electronics to textiles and vehicles, and from pharmaceuticals to residential and commercial energy efficiency products.

The ACC would like to commend the Department of Treasury ("Treasury") and the Internal Revenue Service (the "IRS") on their significant, ongoing, intensive efforts to provide substantial and timely guidance on the provisions enacted by the Tax Cuts and Jobs Act ("TCJA").

We are pleased to submit the following comments on the guidance related to foreign tax credits contained in REG-105600-18, Guidance Related to the Foreign Tax Credit, Including Guidance Implementing Changes Made by the Tax Cuts and Jobs Act (hereinafter referred to as the "Proposed Regulations.")

General Comments

We commend the Treasury and the IRS for their formidable efforts in drafting detailed guidance to determine the foreign tax credit as a result of the major structural changes made by the TCJA to the prior-law foreign tax credit provisions, as well as updating a number of the foreign tax credit provisions of prior law that continue to apply under the TCJA. While detailed and complex, the guidance provided by the Proposed Regulations will inform taxpayers as to how to navigate the current foreign tax credit provisions, both for purposes of planning and compliance.

Proposed Regulation: § 1.904-2(j)(1)(H), Transitional
rule for carryovers and carrybacks of pre-2018 and
post-2017 unused foreign tax

We support the safe harbor rule under Prop. Reg. § 1.904-2(j)(1)(ii), which allocates pre-2018 unused foreign taxes in the general category to the post-2017 general category and the exception under Prop. Reg. § 1.904-2(j)(1)(iii) for taxpayers who choose to reallocate such foreign taxes to the foreign branch basket. This transitional rule appropriately addresses taxpayer concerns regarding the complexity of applying major changes to section 904 under TCJA on a retroactive basis while also providing transitional relief to taxpayers who would otherwise have lost valuable tax attributes during the transition to the TCJA regime. Treasury should adopt this transitional rule in the final regulations.

Proposed Regulation: § 1.78-1(c), Applicability date

Issue: Deemed paid taxes under section 960 treated as a dividend under section 78 are generally not eligible for a section 245A deduction. However, the current interaction of prior law section 78 and new section 245A could be interpreted to apply the section 245A dividends received deduction to a section 78 Controlled Foreign Corporation ("CFC") dividend inclusion that relates to taxable years of foreign corporations that begin before January 1, 2018. The Proposed Regulations provide that section 78 dividends that relate to taxable years that begin before January 1, 2018, are not treated as dividends for purpose of section 245A. The Preamble to the Proposed Regulations state that: "{t]his rule is necessary by reason of the enactment of section 245A to ensure that similarly situated taxpayers do not have different tax consequences under section 245A with respect to section 78 dividends." The purpose of the rule was to prevent a taxpayer from obtaining the benefit of both a credit under section 901 and a deduction with respect to the same foreign tax.

Proposed Solution: Although understandable that the Treasury and the IRS would address this effective date mismatch issue and the potential for a double benefit with respect to the same foreign tax, it is not clear that the Treasury and the IRS have the authority to change effective dates for provisions that on their face are clear in the statute. We note that the Tax Technical and Clerical Corrections Act, Discussion Draft, released by former Chairman Kevin Brady on January 2, 2019, Section 4(11)(2), would address the timing difference by clarifying that section 78 gross-up amounts are not eligible for the section 245A dividends received deduction in the case of fiscal year taxpayers for their 2017 taxable year. This document is only a draft and has not been formally introduced as a bill to be considered by legislation. Accordingly, we suggest that final regulations should be modified to follow the statutory language in the TCJA, which is current law.

Proposed Regulation: § 1.861-9(e)(8), Special rule
for specified partnership loans ("SPL")

Issue: This proposed rule is designed to align the treatment by a lender of interest income from an SPL with that of the associated interest expense of the affiliated partner in a borrower partnership. The Treasury and IRS have promulgated this rule to remove the distortive effects in the foreign tax credit limitation when a United States person lends to a partnership in which the person, or another member of the person's affiliated group, is a partner. The proposed rule removes this distortion by providing that to the extent the lender, or another member of its affiliated group, in a SPL transaction takes into account both interest expense and income, the interest income is assigned to the same statutory and residual groups as those groups from which the interest expense is deducted. The mirror situation, where a United States person, or an affiliated group member of such person, borrows from a partnership in which it is a partner, causes similar distortive effects.

Proposed Solution: ACC respectfully requests that the Treasury and IRS expand the proposed rule to address this reverse fact pattern so that interest expense and interest income are treated in the same manner. A SPL transaction should include a loan from a partnership to a lender where a United States person, or a member of that person's affiliated group, is both a partner in the lending partnership and the borrower. ACC's proposal is consistent with the policy objective found in the Preamble of the Proposed Regulations and would make the rules better able to address that objective by covering a complete set of distortions, rather than missing half of the set as the Proposed Regulations currently do.

Proposed Regulation: § 1.960-1(a)(1), Overview —
Scope of §§ 1.960-1 through 1.960-3

Issue: Section 1293(f) grants a 10-percent corporate shareholder a foreign tax credit for amounts included from owning stock of a qualified electing fund under section 1293(a) through including such amounts as if they were included under section 951(a). This provision states that "These regulations provide the exclusive rules for determining the foreign income taxes deemed paid by a domestic corporation." By not referencing section 1293(0, the Proposed Regulations under section 960 do not address directly the credibility of deemed paid foreign income taxes granted by section 1293(f).

Proposed Solution: While a shareholder can rely on section 1293(0 to claim foreign tax credits on amounts included from a qualified electing fund, a regulatory reference to the Section 1293 rules would be a helpful clarification for the avoidance of any doubt as to creditability.

Proposed Regulation: § 1.960-2(b)(1), Foreign income taxes deemed paid under section 960(a) — In general

Issue: This provision provides that no foreign income taxes are deemed paid under section 960(a) with respect to an inclusion under section 951(a)(1)(B). The Preamble to the Proposed Regulations states:

Section 960(a) treats foreign income taxes of a CFC as deemed paid by a United States shareholder only with respect to an item of a CFC that is included in the gross income of the United States shareholder under section 95140(4 Proposed 1.960-2(b)(1) treats taxes as deemed paid under section 960(a) specifically with respect to subpart F inclusions because the inclusions are with respect to items of income of the CFC. In contrast, an inclusion under section 951(a)(1)(B) is not an inclusion of an "item of income" of the CFC but instead is an inclusion equal to an amount that is determined under the formula in section 956(a). Therefore, proposed § 1.960-2(b)(1) provides that no foreign income taxes are deemed paid under section 960(a) with respect to an inclusion under section 951(a)(1)(B).

Proposed Solution: Section 956 was not repealed, but was ultimately retained without any explanation. Treasury and the IRS previously issued proposed regulations under Section 956 to remedy the perceived asymmetry between the U.S. Federal income taxation of an actual dividend under section 245A and a section 956 inclusion, which inclusion is substantially equivalent to, but not, a dividend. (See REG-114540-18.) These previously issued proposed regulations remedy the perceived asymmetry by providing that the amount of a section 956 inclusion of a U.S. corporate shareholder is reduced to the extent the U.S. corporate shareholder would have been allowed a dividends received deduction under section 245A if the U.S. corporate shareholder had actually received a distribution from a CFC in an amount equal to the amount otherwise determined under section 956. That reduction can be equal to the full amount of the section 956 inclusion or a lesser amount, depending on the circumstances.

We submit that the Preamble's analysis and the rule at § 1.960-2(b)(1) does not reflect the statutory language of section 960(a). In our view, section 960(a) should be read to provide that a U.S. corporate shareholder that includes any item of income under section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a U.S. shareholder shall be deemed to have paid "so much of such corporation's foreign income taxes as are properly attributable to such item of income." Clarification is necessary because otherwise the Proposed Regulations could be interpreted such that if a U.S. corporation were to not qualify under REG-114540-18 it would not get a credit. Section 960(a) should enable a U.S. corporate shareholder to benefit from deemed-paid credits with respect to an inclusion under section 951(a)(1)(A) (Subpart F) as well as for an inclusion under section 951(a)(1)(B) (section 956).

Congress could have drafted section 960(a) to limit its application to Subpart F inclusions; but the statute was not drafted in that way. Therefore, we respectfully submit that when the Proposed Regulations are finalized, it should provide that a U.S. corporate shareholder can claim deemed paid foreign tax credits under section 960(a) for a section 956 inclusion.

Proposed Regulation: § 1.904-6(a)(1)(iv),
Base and timing differences

Issue: Under a plain reading of the regulatory language in §1.904-6(a)(1)(iv), the foreign tax must be allocated and apportioned to a separate category as if the income were recognized under Federal income tax principles in the year in which the tax was imposed. Once a taxpayer has determined that an item of income is not recognized in the current year for Federal tax purposes, the regulatory language requires taxpayers to hypothesize whether that item of income would be recognized in a later year. If the taxpayer determines the income would be recognized in the later year, the tax is allocated and apportioned to that hypothetical income.

When a U.S. corporation has a calendar year end and owns controlled foreign corporations with fiscal year ends for US tax purposes (e.g., November 30), the U.S. corporation will have a timing difference between the year in which the foreign taxes are treated as paid or accrued for U.S. tax purposes and the year in which the U.S. corporation recognizes the related income. For example, foreign taxes accruing on December 31, 2018, under foreign law are treated as current year taxes for the CFC's U.S. tax year ending November 30, 2019, even though most of the foreign tax is imposed on earnings that the U.S. sees as attributable to the 11 months of CFC's earnings falling within its tax year ending November 30, 2019. Section I.904-6(a)(1)(iv) requires the U.S. corporation to determine whether the income would be recognized for Federal income tax purposes in the year the tax is imposed. A literal reading of this rule requires the U.S. corporation to characterize the CFC's income as if it had been earned in the year the tax is imposed. In a case where a CFCs 2018 income would be characterized as tested income if earned 2019, the timing difference rule allows the U.S. corporation to characterize the 2018 income as tested income for purposes of applying §1.904-6(a)(1)(iv).

Proposed Solution: Although there is language in Prop. Reg. § 1.904-6(a)(1)(iv) that can be read to provide that taxes incurred in December of 2018 should be able to be used in the 2019 FY, that conclusion should be clearly confirmed.

Conclusion

Thank you for the opportunity to submit these comments. We continue to welcome the opportunity to work with Treasury and the IRS as they promulgate guidance.

Sincerely,

Cal Dooley
President and CEO
American Chemistry Council
Washington, DC