Chemistry Council Comments on DRD Regs

October 21, 2019

Mr. David J. Kautter
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Ave., N.W.
Washington, D.C. 20220

Mr. Lafayette G. "Chip" Harter
Deputy Assistant Secretary for International Affairs
Department of Treasury
1500 Pennsylvania Ave., N.W.
Washington, D.C. 20220

Mr. Charles Rettig
Commissioner
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, D.C. 20224

Mr. William Paul
Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, D.C. 202224

Re: Comments on Temporary Regulations under Section 245A

Dear Sirs:

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 again like to commend the Department of Treasury (Treasury) and the Internal Revenue Service (the IRS) on their significant efforts to provide substantial and timely guidance on the provisions enacted by the Tax Cuts and Jobs Act (TCJA), including the temporary regulations issued on June 2019 under 26 U.S.C. § 245A. This letter is submitted in direct response to the June 2019 solicitation of comments on the applicability of Section 245A to controlled foreign corporations (CFCs).

In passing TCJA, Congress shifted from a worldwide tax system to a quasi-territorial system. Congress chose to tax foreign earnings either _:currently (branch, GILTI, Subpart F) or not at all (foreign oil and gas extractive income, net deemed tangible income return). Accordingly, Congress intended to treat foreign earnings differently based on targeted policy concerns. The IRC § 245A¹ dividends received deduction (DRD) is the principal mechanism to ensure foreign earnings Congress intended to be exempt from U.S. taxation remain exempt as the earnings flow back tó the United States.

IRC § 245A(a) facilitates a DRD for the foreign-source portion of a dividend received by a domestic corporation from a lower-tier specified 10% owned corporation (SFC). The statute is silent on the application of IRC § 245A(a) to a dividend received by CFCs from an SFC. However, the legislative history paints a clear picture that Congress intended for IRC § 245A(a) to apply to a CFC's dividend income that would otherwise be Subpart F income.

Specifically, the legislative history of IRC § 245A(a) states that the DRD is available to:

"[. . .] a controlled foreign corporation treated as a domestic corporation for purposes of computing the taxable income thereof. See Treas. Reg. § 1.952-2(b)(1). Therefore, a CFC receiving a dividend from a 10-percent owned foreign corporation that constitutes Subpart-F income may be eligible for the DRD with respect to such income."²

This statement effectively answers the question at hand — namely that IRC § 245A(a) can apply to a CFC's dividend income from SFCs that would otherwise be Subpart F income.³ This legislative history is not the only indicia of Congressional intent that IRC § 245A(a) applies to a CFC. Other Internal Revenue Code sections rely on the application of IRC § 245A at the CFC level, namely Section 964(e) and 245A(e), Further, IRC § 245A relies on the definition of a "United States shareholder,"⁴ a term that applies to indirect ownership in foreign corporations, which recognizes that IRC § 245A can apply to dividends received by a CFC from lower-tier SFCs (i.e. through indirect ownership).

The alternative interpretation — that IRC § 245A does not apply to dividends received by CFCs from SFCs — results in a discrepancy in the taxation of dividends in tiered and flat corporate structures. From a tax policy perspective, this alternative interpretation leads to a nonsensical result: Why should dividends paid by an SFC directly to a U.S. shareholder qualify for the 100% DRD, yet dividends indirectly paid by an SFC to a U.S. shareholder not qualify for the DRD and be subject to tax at a 21% rate? There is no policy justification for the disparate taxation that would result from an alternative interpretation.

Treasury and the IRS have clear authority to clarify that the IRC § 245A DRD applies to dividends received by a CFC from an SFC that would otherwise be Subpart F income. Congress granted such authority in IRC § 245A(g):

"The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section [. . . .]"⁵

Additional authority to apply the IRC § 245A DRD at the CFC level can be found in IRC § 964(a), which states Treasury and the IRS may issue regulations to determine the earnings and profits of a foreign corporation for purposes of Subpart F income in a similar manner as a domestic corporation.⁶

We recommend that Treasury and IRS issue regulations effecting the intent of Congress. Such regulations would confirm that the IRC § 245A(a) DRD applies to dividends received by CFCs from SFCs that would otherwise be Subpart F income.

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

cc:
Logan M. Kincheloe, Office of Associate Chief Counsel, (International), CC:PA:LPD:PR, Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044