Beer Company Wants Clearer Guidance on Hybrid Arrangements

May 22, 2020

CC:PA:LPD:PR (REG-106013-19)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re:Comments on proposed regulations under section 245A(e) (REG-106013-19)

Dear Sirs or Madams,

Molson Coors Beverage Company ("Molson Coors") appreciates this opportunity to comment on the Notice of Proposed Rulemaking under section 245A(e)¹ that was published in the Federal Register on April 8, 2020 (the "Proposed Regulations").² On the same date, the U.S. Department of the Treasury (the "Treasury Department") and the Internal Revenue Service (the "IRS") also published in the Federal Register final regulations (the "Final Regulations") under section 245A(e).³ The Proposed Regulations provide welcome relief to taxpayers with the introduction of a new rule that adjusts hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation ("CFC') that are included in income by a United States shareholder ("U.S. Shareholder"). This letter sets forth Molson Coors' recommendations regarding the Proposed Regulations.

I. MOLSON COORS BEVERAGE COMPANY

Molson Coors, a domestic corporation, is one of the world's largest brewers with a diverse portfolio of owned and partnered brands. With its North American operational headquarters in Chicago, Illinois, the U.S. segment of Molson Coors employs over 7,000 people and is the second largest brewer in the United States by volume; selling approximately 23% percent of the total 2019 U.S. brewing industry's shipments (excluding exports).

II. SUMMARY OF RECOMMENDATIONS

As described in more detail in Part IV of this comment letter, Molson Coors respectfully recommends that the Treasury Department and the IRS finalize the proposed regulations with the following modifications.

III. BACKGROUND

Section 245A(e) and the Final Regulations provide that if a U.S. shareholder receives a hybrid dividend, then the U.S. shareholder is not allowed a deduction under section 245A(a) and the rules of section 245A(d) apply to disallow foreign tax credits and deductions.⁴ Similarly, hybrid dividends received by certain upper-tier CFCs are treated as subpart F income, and the rules of section 245A(d) also apply to a U.S. shareholder's pro rata share of such subpart F income.⁵ The operational rules under Treas. Reg. §1.245A(e)-1(d)(1) of the Final Regulations require that a U.S. shareholder or an upper-tier CFC (each, a "specified owner") that holds a share of CFC stock maintain a hybrid deduction account with respect to such share reflecting hybrid deductions allocated to that share. A hybrid dividend is defined by reference to such accounts; thus, an amount received by a U.S. shareholder from a CFC is a hybrid dividend to the extent of the sum of the balance of all hybrid deduction accounts that a U.S. shareholder has maintained with respect to each share of stock of the CFC as of the close of the CFC's tax year.⁶

For these purposes, Treas. Reg. §1.245A(e)-1(d)(2)(i) defines a "hybrid deduction" of a CFC as a deduction or other tax benefit that (A) is allowed to the CFC (or a related person) under a relevant foreign tax law, regardless of whether the deduction or other tax benefit is used, or otherwise reduces tax, currently under the relevant foreign tax law; and (B) relates to or results from an amount paid, accrued, or distributed with respect to an instrument issued by the CFC and treated as stock for U.S. tax purposes, or is a deduction allowed to the CFC with respect to equity.

Acknowledging that hybrid deduction accounts with respect to stock of a CFC should be reduced in certain cases, the Proposed Regulations include a new rule that, as part of the required end-of-year adjustments to a hybrid deduction account,⁷ reduces the balance of the account for three categories of income: subpart F income inclusions, GILTI inclusions, and certain section 956 inclusions.⁸ In this regard, the preamble to the Proposed Regulations explains that hybrid deduction accounts should be reduced to the extent that earnings and profits of a CFC that have not been subject to foreign tax as a result of certain hybrid arrangements are included in income in the United States, neutralizing the double non-taxation effects of the hybrid deductions.⁹

IV. RECOMMENDATIONS

This Part IV contains a more detailed discussion of the recommendations in Part II of this comment letter.

1. Audit Adjustments and Other Disallowed Deductions

As described in Part III of this comment letter, for a deduction or other tax benefit to be treated as a hybrid deduction, the deduction or other tax benefit must be "allowed to the CFC (or a related person) under a relevant foreign tax law."¹⁰ Molson Coors recommends that the Treasury Department and the IRS clarify that a specified owner's hybrid deduction account with respect to stock in a CFC is reduced to the extent that a deduction or other tax benefit originally claimed by the CFC under a relevant foreign tax law is reduced in connection with an audit, examination, judicial proceeding or any similar proceeding under foreign law (a 'foreign audit").

When a hybrid deduction is disallowed in connection with a foreign audit, no deduction or other tax benefit is allowed to a CFC; therefore, the better interpretation of Treas. Reg. §1.245A(e)-1(d)(2)(i) currently is that such amount is not treated as a hybrid deduction. This result is also consistent with sound tax policy, given that there is no double tax benefit with respect to such amount. However, the lack of an express reference to adjustments in connection with a foreign audit in the Final Regulations creates a degree of uncertainty as to whether, and how, the TRS will permit appropriate adjustments to be made to a hybrid deduction account. Accordingly, Molson Coors recommends that the Treasury Department and the IRS confirm that a specified owner may adjust its hybrid deduction account in the event of a foreign audit adjustment. Similar rules should apply with respect to other disallowances under relevant foreign tax law. For instance, other disallowances could result from lower deduction limitations due to a foreign net operating loss ("foreign NOL") carryback or other adjustment to taxable income that lowered deduction limitations under a relevant foreign tax law.

2. Procedural Guidance Regarding Adjustments to Hybrid Deduction Accounts

Consistent with the prior recommendation in Part IV.1 of this comment letter, Molson Coors recommends that the Treasury Department and the IRS provide guidance regarding the process by which a specified owner should, in the event of an adjustment resulting from a foreign audit or other disallowance under relevant foreign tax law, (i) reduce its hybrid deduction account by an amount equal to the amount of the audit adjustment, and (ii) claim a deduction under section 245A(a), or reduce subpart F income recognized by reason of section 245A(e)(2), with respect to a dividend that was treated as a hybrid dividend solely by reason of the disallowed hybrid deduction. Specifically, the guidance should confirm that a U.S. shareholder may amend its U.S. income tax return corresponding to the year of the CFC in which the hybrid deduction was initially claimed. The guidance should also expressly provide that a U.S. shareholder may amend its U.S. federal income tax return for any taxable year with respect to which the U.S. shareholder was denied a deduction or included in income its pro rata share of subpart F income, solely by reason of the disallowed hybrid deduction.

To limit administrative burden on both taxpayers and the IRS, Molson Coors recommends that the Treasury Department and the IRS consider adopting an elective procedure by which a U.S. shareholder may elect, in lieu of amending its income tax returns, to adjust a hybrid deduction account with respect to shares of a CFC (including a hybrid deduction account of an upper-tier CFC with respect to shares of a lower-tier CFC) as of the end of the CFC's taxable year in which the foreign audit adjustment occurs. To allow taxpayers to fully recover the benefit of any previously disallowed deductions under section 245A(e), such adjustment should allow an account balance to be negative.

3. Unused and Recaptured Hybrid Deductions

i. Overview

The Final Regulations provide that a deduction or other tax benefit may be treated as a hybrid deduction whether or not the deduction or other tax benefit may be used by a CFC (or a related person). The preamble to the Final Regulations indicates that the Treasury Department and the IRS determined that an amount should be treated as a hybrid deduction even if it is not used currently because it could potentially be used in another taxable period, resulting in double non-taxation.¹¹ In addition, the preamble to the Final Regulations indicates that Treasury and the IRS were concerned that it could be complex or burdensome to determine whether a deduction or other tax benefit is used currently and to track such amount to the extent it is not used currently.¹²

Molson Coors appreciates the potential difficulties in administering such rules. However, Molson Coors believes that this concern must be balanced with the fact that a relevant foreign tax law often effectively disallows a hybrid deduction. Failing to provide for an adjustment to hybrid deduction accounts in such instances amounts to the application of section 245A(e) to non-hybrid dividends. In the interest of striking the appropriate balance between administrability and fairness, Molson Coors recommends that the Treasury Department and the IRS adopt rules allowing for adjustments to a hybrid deduction account in the event in at least two specific cases.¹³

First, a hybrid deduction account should be adjusted when a foreign NOL expires unused. As described in Part IV.3.ii of this comment letter below, it is possible to permit such adjustments through straightforward and administrable allocation rules.

Second, a hybrid deduction account should be decreased by an amount otherwise treated as a hybrid deduction when, by operation of a relevant foreign tax law, the deduction is recaptured through an income inclusion (foreign recapture amount") in a subsequent tax year. For example, a CFC that has claimed a deduction for accrued interest may, under a relevant foreign tax law, be required to recognize income equal to the accrued deduction if the accrued interest is not paid by a certain date. Molson Coors believes that, in contrast to the rules relating to expired foreign NOLs, allocation principles would generally be unnecessary for foreign recapture amounts included by a CFC. There should generally be a clear factual relationship between a hybrid deduction and a corresponding foreign recapture amount, allowing taxpayers to adjust hybrid deduction accounts only when, and to the extent that, a CFC includes a foreign recapture amount in income under a relevant foreign tax law.

ii. Attributing hybrid deductions to expiring foreign NOLs

There are several reasonable approaches to determining the extent to which an expired foreign NOL is attributable to hybrid deductions. In determining the amount of a foreign NOL that is attributable to hybrid deductions, hybrid deductions could be allocated to foreign gross income items under the principles of the relevant foreign tax law.¹⁴ Thus, for example, a foreign NOL would be entirely attributable to non-hybrid deductions in a year in which all of the hybrid deductions of a CFC were directly allocable to, and not in excess of, gross income items of a CFC under the relevant foreign tax law. As a result, no adjustments would be made to a specified owner's hybrid deduction account by reason of the expiration of such foreign NOL.

To limit the administrative burden on the IRS associated with determining the extent to which a hybrid deduction is allocable to an item of foreign gross income, a taxpayer could be required to maintain contemporaneous documentation of the allocation of deductions under the relevant foreign tax law as a condition to making an adjustment to its hybrid deduction account. If, however, the Treasury Department and the IRS determine that this approach would entail too much complexity or administrative burden, then mechanical allocation rules would also be appropriate. Expiring foreign NOLs could, for example, be allocated ratably between hybrid and non-hybrid deductions.¹⁵

At a minimum, Molson Coors recommends that the Treasury Department and the IRS adopt a rule that would permit adjustments to hybrid deduction accounts when expired foreign NOLs must have been attributable to hybrid deduction accounts. For example, the final regulations could adopt a stacking rule that would treat hybrid deductions as being allocable to gross income before non-hybrid deductions, ensuring that no double non-taxation benefit may be obtained by a taxpayer. This rule would be appropriate if the Treasury Department and the IRS determine that allocating deductions in accordance with foreign law would be undesirably complex or too difficult to administer, and that allocating deductions on a pro rata basis would be too imprecise in cases in which hybrid deductions were directly allocable to foreign gross income under a relevant foreign tax law. A stacking rule would address both concerns, as it would be a simple mechanical rule that is available only to the extent that the foreign NOL must be attributable to hybrid deductions.

4. Computation of Adjusted Subpart F Inclusions and Adjusted GILTI Inclusions

As described in Part III of this comment letter, the Proposed Regulations reduce a specified owner's hybrid deduction account for certain subpart F inclusions, GILTI inclusions, and section 956 inclusions. The preamble to the Proposed Regulations observes that the entirety of an amount in the first two categories may not actually be included in income in the U.S., including by reason of foreign tax credits associated with the inclusions and, in the case of a GILTI inclusion, the deduction under section 250(a)(1)(B).¹⁶ To account for those attributes, a hybrid deduction account is decreased only by an "adjusted subpart F inclusion"¹⁷ and an "adjusted GILTI inclusion"¹⁸ with respect to the relevant share of stock of a CFC.¹⁹

When the effective foreign tax rate exceeds 21%, in the case of a subpart F inclusion, or 13.125%, in the case of a GILTI inclusion, the mechanical rules for determining adjusted subpart F inclusions and adjusted GILTI inclusions can result in a negative number. For example, under proposed §1.245A(e)-1(d)(4)(ii)(A)(1), the subpart F inclusion attributable to a share is increased by the foreign income tax credits deemed paid by reason of the subpart F inclusion (to reflect the section 78 gross up included in income by the specified owner) with respect to that share; that sum is decreased by an amount intended to equal the amount of related subpart F income offset by such foreign tax credits, which is determined by dividing the foreign tax credits by the U.S. corporate tax rate (21%).²⁰ Thus, if the subpart F inclusion attributable to a share is $75x and the associated foreign income taxes with respect to such inclusion is $25x, the adjusted subpart F inclusion with respect to the share would be -$19x, calculated as $100x ($75x subpart F inclusion plus $25x associated foreign taxes) less $119x ($25x divided by 21%).

As a result, in certain instances, the proposed regulations provide that a hybrid deduction account should be "decreased"²¹ or "reduced"²² by a negative number. Although the Proposed Regulations' adjustment provisions should, as drafted, arguably be interpreted as not providing for an increase to a hybrid deduction account in such cases, the Treasury Department and the IRS should explicitly confirm that no increase to an account may occur by reason when the operative rules result in a negative number. The contrary result would be inappropriate given that it would result in disallowing an amount of deductions under section 245A(e) in excess of the amount of hybrid deductions allowed to a CFC.

Accordingly, Molson Coors recommends that the final regulations clarify that the decrease to a hybrid deduction account described in Prop. Reg. §1.245A(e)-1(d)(4)(i)(B) may never increase a hybrid deduction account. This could be accomplished in a number of ways, including by adopting a rule similar to Prop. Reg. §1.245A(e)-1(d)(4)(i)(B)(1)(ii) for adjusted subpart F inclusions and adjusted GILTI inclusions. That rule would provide that if either amount would be less than zero, then the amount would be considered to be zero.

* * *

Molson Coors appreciates the opportunity to provide comments on the Proposed Regulations. Please feel free to contact me at 303-319-3520 with any questions.

Sincerely,

Mark Saks
VP, Tax
Molson Coors Beverage Company
Chicago, IL