ABA Members Look for Changes to Proposed FDII, GILTI Regs

ABA Members Look for Changes to Proposed FDII, GILTI Regs

American Bar Association Section of Taxation

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (<a href="/lr/resolve//296d8">REG-104464-18</a>) on the deduction for foreign-derived intangible income and global intangible low-taxed income, requesting reconsideration and clarification of several issues that include the exclusion for financial services income and the application of <a href="/research/federal/usc26/250" resolve="/lr/resolve//cqht">section 250</a> to partnerships and their partners. The Tax Cuts and Jobs Act added <a href="/research/federal/usc26/250" resolve="/lr/resolve//cqht">section 250</a> to the code, allowing an FDII deduction to achieve parity with the lower effective tax rate applicable to GILTI. The goal is to neutralize the role of tax considerations for a domestic corporation deciding whether to earn income attributable to foreign operations directly or through foreign subsidiaries treated as controlled foreign corporations under <a href="/research/federal/usc26/957" resolve="/lr/resolve//cq8k">section 957</a>. Section members examine the proposed rules for determining whether a sale of property is treated as for a foreign use, recommending changes to clarify that the relevant testing period is limited to the three years following the date of delivery of the general property. The tax section also asks that the proposed regs clarify that, for a sale of a partnership interest that does not constitute an interest in a widely held or publicly traded partnership (and thus qualifies as general property), the determination of foreign use is made at the partnership level. Members, discussing the exclusion for financial services income, seek specific rules for the characterization and sourcing of income from derivatives and other financial instruments that are not treated as financial services income, such as pairing the treatment of that income with income from related sales and services transactions. The tax section further asks that the proposed regs clarify the treatment regarding the disposition of a partnership interest or disregarded entity for purposes of the expanded definition of “foreign branch income” and provide examples of transactions that the expanded definition is intended to capture. Members seek changes to the definition of foreign branch income for FDII purposes to provide that no adjustments are required under proposed reg. section 1.904-4(f)(2)(vi)(D) if such adjustments would increase the gross income attributable to the foreign branch as a result of the transfer of intangible property from the foreign branch to the foreign branch owner. Addressing the application of <a href="/research/federal/usc26/250" resolve="/lr/resolve//cqht">section 250</a> to partnerships and their partners, tax section members request relief from the requirement that a partnership report some FDII items to its partners on their Schedules K-1 if the partnership has performed reasonable due diligence regarding the identity of its (direct and indirect) partners and reasonably relied on information received from its partners about their non-U.S. or noncorporate status. Moreover, members ask that the proposed regs provide that a domestic corporate partner’s <a href="/research/federal/usc26/250" resolve="/lr/resolve//cqht">section 250</a> deduction is disregarded for purposes of calculating the partnership’s adjusted taxable income under <a href="/research/federal/usc26/163#cqcf-0000196" resolve="/lr/resolve//cqcf#cqcf-0000196">section 163(j)(4)(A)</a>. Lastly, section members ask for changes related to general services provided to business recipients. Specifically, they request that the definition of “benefit” in proposed reg. section 1.250(b)-5(c)(1) be modified so that it references <a href="/research/federal/cfr26/1.482-9#cxxl-0000128" resolve="/lr/resolve//cxxl#cxxl-0000128">reg. section 1.482-9(l)(3)(i)</a>, with a rebuttable presumption of a “benefit” in the case of unrelated-party transactions. They also ask that the regs clarify that when a recipient of a service, such as a foreign partnership, does not have an office or other fixed place of business, that the recipient is presumed to have operations in the location where it is formed or incorporated; that service renderers must obtain documentation only to the effect that benefits are accruing to service recipients in non-U.S. locations generally to increase consistency in taxpayer compliance and administrability of the rules; and that service renderers may use any reasonable documentation to identify the location of benefits accruing to service recipients.

The American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-104464-18) on the deduction for foreign-derived intangible income and global intangible low-taxed income, requesting reconsideration and clarification of several issues that include the exclusion for financial services income and the application of section 250 to partnerships and their partners.

Eric Solomon of the American Bar Association Section of Taxation has submitted comments on proposed regulations (REG-104464-18) on the deduction for foreign-derived intangible income and global intangible low-taxed income, requesting reconsideration and clarification of several issues that include the exclusion for financial services income and the application of section 250 to partnerships and their partners. The Tax Cuts and Jobs Act added section 250 to the code, allowing an FDII deduction to achieve parity with the lower effective tax rate applicable to GILTI. The goal is to neutralize the role of tax considerations for a domestic corporation deciding whether to earn income attributable to foreign operations directly or through foreign subsidiaries treated as controlled foreign corporations under section 957. Section members examine the proposed rules for determining whether a sale of property is treated as for a foreign use, recommending changes to clarify that the relevant testing period is limited to the three years following the date of delivery of the general property. The tax section also asks that the proposed regs clarify that, for a sale of a partnership interest that does not constitute an interest in a widely held or publicly traded partnership (and thus qualifies as general property), the determination of foreign use is made at the partnership level. Members, discussing the exclusion for financial services income, seek specific rules for the characterization and sourcing of income from derivatives and other financial instruments that are not treated as financial services income, such as pairing the treatment of that income with income from related sales and services transactions. The tax section further asks that the proposed regs clarify the treatment regarding the disposition of a partnership interest or disregarded entity for purposes of the expanded definition of “foreign branch income” and provide examples of transactions that the expanded definition is intended to capture. Members seek changes to the definition of foreign branch income for FDII purposes to provide that no adjustments are required under proposed reg. section 1.904-4(f)(2)(vi)(D) if such adjustments would increase the gross income attributable to the foreign branch as a result of the transfer of intangible property from the foreign branch to the foreign branch owner. Addressing the application of section 250 to partnerships and their partners, tax section members request relief from the requirement that a partnership report some FDII items to its partners on their Schedules K-1 if the partnership has performed reasonable due diligence regarding the identity of its (direct and indirect) partners and reasonably relied on information received from its partners about their non-U.S. or noncorporate status. Moreover, members ask that the proposed regs provide that a domestic corporate partner’s section 250 deduction is disregarded for purposes of calculating the partnership’s adjusted taxable income under section 163(j)(4)(A). Lastly, section members ask for changes related to general services provided to business recipients. Specifically, they request that the definition of “benefit” in proposed reg. section 1.250(b)-5(c)(1) be modified so that it references reg. section 1.482-9(l)(3)(i), with a rebuttable presumption of a “benefit” in the case of unrelated-party transactions. They also ask that the regs clarify that when a recipient of a service, such as a foreign partnership, does not have an office or other fixed place of business, that the recipient is presumed to have operations in the location where it is formed or incorporated; that service renderers must obtain documentation only to the effect that benefits are accruing to service recipients in non-U.S. locations generally to increase consistency in taxpayer compliance and administrability of the rules; and that service renderers may use any reasonable documentation to identify the location of benefits accruing to service recipients.

Sec. 250 Foreign-derived intangible income and global intangible low-taxed income

Sec. 962 Election by individuals to be subject to tax at corporate rates

Sec. 1502 Regulations

Sec. 6038 Information reporting with respect to certain foreign corporations and partnerships

Sec. 6038A Information with respect to certain foreign-owned corporations

United States

Corporate taxation

Foreign-source income

Global intangible low-taxed income (GILTI)

Intangible assets

Tax Cuts and Jobs Act

Eric Solomon

DOC 2019-24102

2019 TNTI 120-28

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Eric Solomon is a partner in the tax practice at Steptoe &amp; Johnson LLP.
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ABA Members Look for Changes to Proposed FDII, GILTI Regs