Course Name: International Tax Reform and Related Guidance ... · What aspects of the 2017 tax law will have the largest impact on your organization? Chief Tax Officer survey . 35%

Course Name: International Tax Reform and Related Guidance Speaker: Todd Garrett, KPMG LLP Course Description: Overview of the International Tax Provisions and recent guidance from IRS and Treasury arising from the Tax Cuts and Jobs Act of 2017. Learning Objectives: Participants will: 1. Receive an overview of the international tax provisions arising from the Tax Reform; 2. Learn the new developments from 2018 and 2019 arising from IRS and Treasury guidance related to those provisions; and 3. Learn about the new tax compliance and reporting requirements for calendar year 2018 companies. Category: Basic/Technical Prerequisites: None

International Tax reform update

Impact on tax departments

Todd Garrett

April 29, 2019 | DALLAS, TEXAS

Chief Tax Officer study

3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 838800

Key findingsChief Tax Officer survey

of companies are addressing global tax reform at the board or audit committee level.

of CTOs are planning to make changes to their organization to accommodate tax planning.

of CTOs are bullish on theglobal economy and company growth over the next 12 months and the next three years.


Key findings (continued)Chief Tax Officer survey

of CTOs say investment in data and analytics and in emerging technologies will see the biggest increase in the tax function over the next 12 months.

of CTOs say their role has changed since taking over the CTO function.

of CTOs believe their departmentis keeping ahead of technologicalinnovation.


2017 Tax reform legislation

Getting ready for the new tax landscape

Chief Tax Officer survey

29

35

27

6 2

When organizations anticipate makingchanges to tax planning (in percentages)*

Less than 6 months

6 months but less than 12 months

12 months but less than 18 months

18 months or longer

No changes planned

*Does not add up to 100% due to rounding


2017 Tax reform legislation (continued)

What aspects of the 2017 tax law will have the largest impact on your organization?


35%

39%

37%

37%

36%

Corporate rate reduction

State and local tax implications

GILTI

Financial accounting considerations

Base erosion anti-abuse tax (BEAT)

*Multiple responses allowed.

33%

31%

25%

22%

Changes in industry-specific taxes(tax-exempt organizations, financial institutions, RICs, and REITs)

Individual income tax rate reductions

Repeal of corporate AMT

Repeal of individual mandate in ACA


Conclusion

Chief Tax Officers are facing two major forces impacting their function: disruptive technologies and tax reform. Thus, their agendas must include the following:


TechnologyConsidered a largely untapped potential, technology will play a big role in increasing the speed, efficiency, and the value of the tax role. With less than half of CTOs believing that the tax function is keeping up with innovation, more needs to be done.

CollaborationAlready the biggest part of how the CTO’s roles have been changing, collaboration across the enterprise needs to continue to increase. In a connected enterprise, it’s imperative for the tax function to collaborate not only with financial executives but also with line of business leaders.

Driving value for the organizationThe tax reform increased reporting obligations, driving the need for collecting and analyzing more detailed data. The tax function can use this data to manage risk and drive value for the organization. The success of adding value is predicated on the tax function’s embrace of technology and collaboration.

Tax reimagined overview


Global trends impacting the tax function

Political— Global tax

reform — Globalization

versus localization

— Tax transparency & responsibility

— Data residency, ownership, privacy

Technology— Cloud— Intelligent

automation— Enterprise data

strategies— Block chain— Cross function

business digitization

Economic— GE transaction— Budget

constraints— Access to Big 4

Scale— Labor arbitrage

in remote locations

— Outsourcing— Transformation— Data access

Social— Digital vs.

Human labor— Evolving

workforce skills and desires

— Gig economy— Alternative

workforce solutions

Regulator— Utilization of

technology— Direct access to

data and use of data analytics

— “Cost” of non-compliance


Tax reimagined

Tax Reimagined is a technology-first holistic approach to develop a future state Target Operating Model for your tax function that:— Reduces costs, often times allowing for savings

between 20% and 30%,

— Maintains and improves quality, and

— Unlocks value.

Tax Reimagined brings together:— Deep experience

— Compliance sourcing strategies

— Transformation capabilities

— Technology innovation expertise

— The power of KPMG’s deep commitment to tax innovation and leading edge tax technologies

— Balances the blend between co-sourcing, technology and offshoring

— We tailor a Target Operating Model solution for our clients that takes into account their specific facts, circumstances and needs.

International tax compliance


Notice

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Agenda

— Overview of changes in U.S. International tax compliance— Section 965 mandatory repatriation— Global Intangible Low-Taxed Income (“GILTI”)— Previously Taxed Earnings & Profits (“PTEP”)— Changes to subpart F reporting— Foreign-Derived Intangible Income (“FDII”)— Base Erosion Minimum Tax (“BEAT”)— Section 163(j)— Changes to other international tax forms— Q&A

Overview of changes in U.S. international tax compliance


Changes to existing forms

— 1120 – U.S. Corporation Income Tax Return – Expanding from 5 pages to 6 pages.

— 5471 – Information Return of U.S. Persons with Respect To Certain Foreign Corporations – New schedules added including Schedule I-1 and Schedule P. Revisions of all existing schedules, which include major revisions to Schedule B, G, E, J and H, and multiple revisions to Schedule C, F, I and M.

— 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities – New Schedules I and J added. Revisions to existing schedules, which include Schedule C, C-1, and G.

— 1118 – Foreign Tax Credit-Corporations – New schedules and changes to existing schedules for GILTI. Schedules C, D, and E are new. Schedule J changed for GILTI and Foreign Branch reporting.

— 8865 – Return of U.S. Persons with Respect to Certain Foreign Partnerships – New schedules added including Schedule G and Schedule H, and revisions of Schedules K, K-1, and O.

— 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code) – Penalty for failure to furnish information or maintain records increased from $10k to $25k per return. New sections added including Part VIII (BEAT), Part VII Lines 6a-6d (section 250 deduction for GILTI/FDII), Part VII Lines 5a-5b (deductions disallowed under section 267A).


New forms

— 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System – New form plus conversion of 2017 worksheets to 965 schedules. E-file added for 2018.

— 8990 – Limitation on Business Interest Expense Under Section 163(j).— 8991 – Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts.— 8992 – U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI).— 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global

Intangible Low-Taxed Income (GILTI).


Penalties for non-filing

— Failure to furnish information required under Sections 6038 (Forms 5471, 8865 & 8858), 6038A (Form 5472), 6038B (Form 926), 6038D (Form 8938), 6046 (Form 5471), 6046A (Form 8865), or 6048 (Form 3520) may have the following consequences:- Penalty under relevant code section for failure to furnish information (e.g., $10,000

for each Form 5471, $25,000 for each Form 5472) - 40% penalty under section 6662 for any understatement of tax

— Statute of Limitations: Under Section 6501(c)(8), the three year statute of limitation ("SOL") will not begin to run until the information is provided to the IRS- If a taxpayer fails to file, or files substantially incomplete international tax

compliance forms and cannot rely on reasonable cause for such incomplete filings, this could potentially keep open the entire tax return (i.e., not limited to the Forms 926, 5471, 5472, 8858, 8865, etc.) until the information is furnished. However, if such failure to furnish the information is due to reasonable cause and not willful neglect, extension of the SOL shall apply only to the item or items related to such failure

Section 965 mandatory repatriation


Overview of section 965 transition tax

Accumulated Post-1986 Deferred Foreign Income (DFI)— Post-86 E&P other than:

- Income effectively connected with a U.S. trade or business- Previously taxed earnings & profits (PTEP) (for SFCs that are CFCs) that, if

distributed, would be excluded from the U.S. shareholder’s gross income— Measured as of 11/2/2017 or 12/31/2017 (the greater of) — Without reduction for dividends distributed in inclusion year other than dividends paid

to other SFCs— Deficits shared within a U.S. shareholder chain and within affiliated groups – measured

on 11/2 only— Foreign cash position taxed at 15.5% ETR, other E&P taxed at 8% ETR— Can be offset by NOLs or FTCs (subject to expense allocation)— Can elect to pay in 8 installments


Relevant forms

Form 965: Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System— Schedule A: U.S. Shareholder’s Section 965(a) Inclusion Amount— Schedule B: Deferred Foreign Income Corporation’s E&P— Schedule C: U.S. Shareholder’s Aggregate Foreign E&P Deficit— Schedule D: U.S. Shareholder’s Aggregate Foreign Cash Position— Schedule E: U.S. Shareholder’s Aggregate Foreign Cash Position – detail— Schedule F: Foreign Taxes Deemed Paid by Domestic Corporation (2018)— Schedule G: Foreign Taxes Deemed Paid by Domestic Corporation (2017)— Schedule H: Amounts Reported on Forms 1116 and 1118Form 965-A: Individual Report of Net 965 Tax Liability Form 965-B: Corporate and Real Estate Investment Trust (REIT) Report of Net 965 Tax Liability and (REIT) Report of Net 965 Inclusion Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporation




Form 5471 – Category 1 filer

Category 1 (previously reserved) is now used by U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965

Section 965

Global Intangible Low-Taxed Income (“GILTI”)


Calculating GILTIGILTI computation

Each person who is a U.S. shareholder of any CFC for any taxable year shall include in gross income such shareholder’s global intangible low-taxed income for such year

Excess of “net CFC tested income” over “net deemed tangible income return”

Excess of: aggregate of pro rata share of tested income of each CFC, over aggregate of pro rata share of tested loss of each CFC

Excess of: 10% of pro rata share of “qualified business asset investment” (“QBAI”) of each CFC, over interest expense taken into account in determining net CFC tested income

QBAI: adjusted basis of depreciable tangible property used in trade or business, and used in the production of tested income

Excess of: gross income (other than ECI, subpart F income, income excluded under subpart F high-tax exception, related party dividends, and FOGEI), less allocable deductions

Excess of: allocable deductions over gross income (other than ECI, subpart F income, income excluded under subpart F high-taxed exception, related party dividends, and FOGEI)

Section 250 deduction for corporate shareholders allowed based on their GILTI inclusion— Generally, deduction of 50% of GILTI inclusion and section 78 gross-up under Section 250 for tax years beginning

before December 31, 2025 (reduced to 37.5% thereafter), subject to a taxable income limitation

- Results in 10.5% effective tax rate (increased to 13.125%)


Calculating GILTI (continued)

Necessary InformationAll gross income of a CFC, including:— Effectively connected income (ECI)— Subpart F income— Otherwise subpart F income meeting high tax exception of section 954(b)(4)— Dividends received from a related person— Foreign oil and gas extraction incomeDeductions properly allocable to the various types of gross income (including any disallowed interest expense due to application of Section 163(j) at the CFC level)QBAI (recomputed tax basis in tangible property under ADS principles) to the extent related to tested incomeSpecified Interest Expense at the USSH level – generally, the excess of:— Interest expense of each CFC that is taken into account in determining the tested

income or tested loss of the CFC, over— The interest income of each tested income or tested loss CFC that is included in the

CFC’s gross tested income


Schedule I-1Form 5471


Schedule HForm 5471


Form 8992


Form 8992 (continued)


Form 8993


High level overview of FTCsGILTI

Aggregate tested foreign income taxes

Deemed paid creditInclusionpercentage X 80%

Section 78 gross upInclusionpercentage

Tested foreign income taxes Only taxes that are properly attributable to CFC’s tested incomeDoes not include taxes attributable to CFCs with tested losses or taxes attributable to tax exempt income

U.S. shareholders that are corporations can take deemed paid foreign tax credits with respect to their GILTI inclusionThe “inclusion percentage” of “aggregate tested foreign income taxes” is included in income as a dividend under the section 78 gross up rulesThe deemed paid credit for the taxes is haircut to 80% under the statute (and reduced by the inclusion percentage)


Schedule EForm 5471


Schedule E-1Form 5471


New FTC baskets

Section 904(d) limitation baskets post-reform— Section 904(d) currently provides for the four FTC limitation categories listed below, the

first three of which are relevant in the case of CFCs and directly derived income, and only the last in the case of a branch- Amounts includible in gross income under section 951A (GILTI inclusion)- Passive category income- General category income- Foreign branch income (only relevant for U.S. taxpayers)

— Foreign branch defined by reference to a section 989(a) QBU- A QBU is any separate and clearly identified unit of a trade or business of a

taxpayer which maintains separate books and records— A corporation, domestic or foreign, is a QBU— A partnership, trust, or estate is a QBU of a partner or beneficiary— The activities of a corporation or a partnership also qualify as a QBU if:

- They constitute a trade or business and - Separate books and records are maintained for such activities

Foreign subsidiaries


Form 1118GILTI forms


Schedule HForm 1118


Schedule H – Page 2Form 1118

Previously Taxed Earnings & Profits (“PTEP”)


PTEP Notice 2019-01 overview

General overview of notice— Treasury intends to issue new previously taxed earnings and profits (PTEP) proposed

regulations, and withdraw existing PTEP proposed regulations— The Notice describes forthcoming rules on:

- Creation and maintenance of 16 PTEP groups- Ordering rules for PTEP distributions- Adjustment of section 959(c)(3) E&P

Applicability date— Forthcoming regulations will apply to tax years of USSH that end after

December 14, 2018— USSH can rely on the Notice, provided the shareholder and all related persons

consistently apply the rules, beginning with the first tax year that includes the taxable year end of any foreign corporation to which section 965 applies


Section 3.01PTEP Notice 2019-01

Section 3.01: Annual Accounts and PTEP Groups— PTEP maintained in annual accounts, and

segregated into sixteen PTEP groups

– Maintained separately for each FTC basket

– Maintained on a separate dollar basis

– Distribution from a PTEP group reduces basis under section 961(b) (regardless of how basis created)

— Transition rules

959(c)(1) PTEP

Reclassed 965(a)

Reclassed 965(b)

956

Reclassed GILTI

Reclassed 245A (e)

Reclassed 959(e)

Reclassed 964(e)

Reclassed Sub F

Section 956A (repealed)

959(c)(2) PTEP

Section 965(a)

Section 965(b)

GILTI

Section 245A(e)

Section 959(e)

Section 964(e)

Sub F


Ordering rulesPTEP groups

First (all)

959(c)(1) PTEP

Reclassed 965(a)

Reclassed 965(b)

956

Reclassed GILTI

Reclassed 245A (e)

Reclassed 959(e)

Reclassed 964(e)

Reclassed Sub F

Section 956A (repealed)

959(c)(2) PTEP

Section 965(a)

Section 965(b)

GILTI

Section 245A(e)

Section 959(e)

Section 964(e)

Sub F

Second (all)

Fourth (all)

Fifth (all)

Third:

— LIFO

— Pro rata

Sixth:

— LIFO

— Pro rata


New schedule J


New schedule J (continued)


New schedule P


New schedule P (continued)

Changes to Subpart F reporting


Other changes to Form 5471

— Schedule G – Other Information – Doubled in size and may require additional statements- Question 19 on New Schedule G asks whether you answered Yes to any of the

questions in the Form’s Instructions, which include over 20 questions related specifically to determining a CFC’s subpart F income, including, for example:— The determination of gross subpart F income;— If expenses were allocated against subpart F income; — Why amounts (if any) were excluded from subpart F income, etc.

- These new questions on subpart F income require significant information to be attached through whitepaper detail

— New Schedule J, Part II to track Section 952 Recapture


New schedule GForm 5471


New schedule G (continued)Form 5471

Foreign-Derived Intangible Income (“FDII”)


Calculating FDII

Foreign Derived Deduction Eligible Income (“FDDEI”) = DEI from (i) sales (including licenses and leases) to foreign persons for foreign use, or (ii) services provided to foreign persons, or with respect to property located outside the U.S.

Deduction Eligible Income (“DEI”) = (Gross income – Subpart F income – GILTI inclusion –financial services income –dividends from CFCs of which the domestic corporation is a U.S. shareholder – domestic oil and gas extraction income – foreign branch income), reduced by deductions (including taxes) properly allocable to such income pursuant to section 861 principles or other reasonable methods

Deemed Intangible Income (“DII”) = DEI – Deemed Tangible Income Return (“DTIR”)

DTIR = 10% x Qualified Business Asset Investment (“QBAI”)

QBAI = basis in depreciable tangible property that produces DEI (calculated under ADS)

FDII = FDDEI x (DII/DEI)

Section 250 deduction limitation mechanics37.5% section 250 deduction against FDII if not limited (13.125% ETR on qualified income); reduced to 21.875% for TY beginning after 12/31/2025 (16.406% ETR)

The limitation applies when the taxpayer’s GILTI inclusion plus FDII exceeds the taxpayer’s taxable income (determined without regard to the section 250 deduction)


Interaction of Sections 163(j), 172, & 250

In recognizing the overlap of computations for FDII, 163(j), and NOLs, prop. §1.250(a)- 1(c)(4) applies the following ordering rules:1. Compute tentative FDII and section 250 amount taking into account all

deductions, excepta. Carryforwards or disallowances under section 163(j)b. NOLs under section 172(a)c. Taxable income limitation under section 250

2. Compute business interest allowed under section 163(j) (using tentative section 250 deduction from step 1)

3. Compute NOLs under section 172 (using business interest deduction from step 2)4. Compute FDII

a. Taking into account business interest deductions and NOLs, as determined in steps 2 and 3

5. Compute section 250 deductiona. Calculate the limitation using the business interest deductions and NOLs, as

determined in steps 2 and 3

Calculating the Section 250 deduction

53


Key information needed

— Deduction Eligible Income: i.e., gross income less- Subpart F income- GILTI- Foreign Branch Income- Dividends from CFCs; - Other (financial services income, domestic oil and gas extraction income)- Deductions (including taxes) properly allocated to such income

— QBAI: domestic corporation’s basis in depreciable tangible property that produces DEI (calculated under ADS)

— Foreign Derived DEI: i.e., DEI received from foreign sales and services- Sales/dispositions (including leases and licenses) to foreign person for foreign use- Services to foreign person, or with respect to property located outside the U.S.- Additional inquiries needed for related party sales and services

— GILTI inclusion and taxable income for calculating section 250 deduction limitation— Proposed FDII regulations include documentation requirements (foreign person,

foreign use, and foreign location)



Form 5471 new schedule G


Form 1118 new schedule A

Base Erosion Minimum Tax (“BEAT”)


BEAT overview

— Potential addition to regular tax liability— Targets taxpayers making deductible payments to related parties that are foreign

persons— Two Tier Trigger – BEAT Applies:

If there is an Applicable Taxpayer and

To the extent the BEAT tax liability exceeds the regular

tax liability

— Application effectively reverses a portion of deductions attributable to payments to foreign related parties and certain tax credits


Definition

A taxpayer that: — Is a corporation other than a RIC, REIT, or S Corp— Has average annual gross receipts for the 3 year period ending with the preceding

taxable year of at least $500M- Apply rules similar to sections 448(c)(3)(B), (C), and (D) to determine gross receipts- Gross receipts of foreign persons are included only to the extent of ECI

— Has a base erosion percentage (discussed below) of at least 3% (2% for certain financials)- Annual calculation

Applicable taxpayer


Aggregation rules

Aggregation rules apply only for purposes of — determining whether a taxpayer is an Applicable Taxpayer, and — determining the base erosion percentageAll persons treated as a single employer under section 52(a) are treated as 1 person— Applies 1563 control group rules, but includes foreign corporations

- Only count gross receipts that are included in calculating ECI- Similar limit appears intended to apply for base erosion percentage - Implies that U.S. Sub to ECI branch payments are disregarded for gross receipts

and base erosion percentage calculations

Applicable taxpayer


Base erosion minimum tax amount (“BEAT”)

Calculating BEAT

Taxable Income BETBsMTI BEPct § 172 NOL deduction for year

Modified Taxable Income

All credits – R&E Credits – 80% x applicable § 38 Credits[10%] 21% x TI ))

Base Erosion Tax Benefits (“BETB”)

All deductions for the tax year other than under §§172 (NOL), 245A (participation exemption), or 250 (FDII/GILTI)

BEPct

( (

( )


Key information needed

— Gross receipts for the 3 preceding tax years— All deductions for the tax year— Detailed breakdown of Base Erosion Payments by type and type of related person

- See Schedule A— Detailed breakdown of allowable credits

- See Schedule B


Part I


Part II, III, IV


Schedule A


Schedule B


Form 5471 new schedule G

Section 163(j)


Basic statutory framework

Effective for taxable years beginning after 12/31/2017 … no grandfathering of existing debtLimits deductibility on net business interest expense — For tax years beginning after December 31, 2017 through December 31, 2021, the

limitation is: - 30% of ATI = taxable income calculated without regard to interest, depreciation,

depletion or amortization- Plus business interest income and floor plan financing interest

— For tax years beginning after December 31, 2021, the limitation is: - 30% of ATI = taxable income calculated without regard to interest- Plus business interest income and floor plan financing interest

Disallowed deductions can be carried forward indefinitely ... No carryforward or excess limitation

New section 163(j)


Definition of interest

― Appears to be limited to section 163(j) purposes only― Applies to both interest income and interest expense

Amounts paid, received or accrued for the use or forbearance of money and amounts treated as interest under other Code provisions

Specifically enumerated items not falling within general rule

Any expense or loss that is predominantly incurred in consideration of the time value of money

Rules

Amounts paid, received or accrued for the use or forbearance of money and amounts treated as interest under other Code provisions

Specifically enumerated items not falling within general rule

Any expense or loss that is predominantly incurred in consideration of the time value of money

Examples

1

2

3


Default & CFC group methodSection 163(j)

General rules— CFC-level section 163(j) limitation

determined on a CFC-by-CFC basis

— Netting of inter-CFC interest income and expense disallowed in determining 163(j) limitation

— U.S. shareholder ATI determined without regard to Subpart F income, GILTI, and section 78 income net of section 250 deduction related to excluded GILTI

Default method

General rules— Elective method available for certain highly

related CFCs to apply group method approach to determine CFC-level 163(j) limitation and U.S. shareholder ATI adjustments for certain CFC inclusions

— Netting of intragroup business interest expense and income allowed

— Upper-tier CFC-level ATI increased by lower-tier CFC excess taxable income

— USSH ATI decreased by Subpart F, GILTI, S. 78 inclusions (like Default Method) but ETI remaining at highest-tier CFC may be added back to USSH ATI in an amount measured by reference to GILTI/Sub F inclusions at CFC(s) with ETI (determined based on complex computation)

— Election is irrevocable until CFC Group terminates

CFC group method


Form 8990Section 163(j)


Form 8990 (continued)Section 163(j)


Form 8990 (Schedules A & B)Section 163(j)

Changes to other international tax forms


Changes to Form 8858

Changes similar to the previously discussed revisions to Form 5471— New Schedules I and J added. Revisions to existing schedules, which include

Schedule C, C-1, and G.



— Newly added Schedules G and H and new Schedule A-2 (old Schedule A-2 is now Schedule A-3) – all relating to the application of the gain deferral method under section 721(c).

— Revisions to Schedules K, K-1, and O.

Schedule K

Schedule K-1



Increased penalty:— Penalties for failure to file Form 5472. A penalty of $25,000 (increased from $10,000)

will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed. The penalty also applies for failure to maintain records as required by Treas. Reg. 1.6038A-3. If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. Filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.

New sections added:— Part VIII (BEAT)— Part VII Lines 6a-6d (section 250 deduction for GILTI/FDII)— Part VII Lines 5a-5b (deductions disallowed under section 267A)


Changes to Form 5472 – Part VII & VIII

Q&A

States and federal tax reform


State conformity issues

At this point, most static conformity states have updated their conformity to the Code— However, there are some key exceptions (e.g., CA, MN)— Other static states did not address any of the 2018 changes when they updated their

conformity to the IRC (e.g., AZ)— Iowa has delayed conformity until 2019In certain static conformity states, even through the state enacted conformity legislation, the legislature decoupled from various federal changes— Extreme example; Wisconsin decoupled from over 20 separate provisionsMany rolling conformity states have also decoupled from various tax reform change


IRC section 163(j)

Limits on Net Interest Deduction (IRC section 163(j))— H.R. 1 disallows the deduction of net interest expense (excluding floor plan financing

interest) to the extent it exceeds 30% of a taxpayer’s adjusted taxable income (ATI)— Note there are special rules for partnerships; indefinite carryover of disallowed interest What are the state issues?— Does the state conform to revised IRC section 163(j)?— The draft regulations conform that the limitation is computed on a consolidated group

basis. How is the limitation computed for state purposes when the state and federal filing methodologies differ?

— Will the state allow an indefinite carryforward?— How will the this interest expense limitation interact with state related party interest

expense disallowance statutes?

Tax reform impact


Example

Limitation calculation— Interest Income + (Adjusted Taxable Income (ATI) x 30%) = LimitConsolidated limitation— $500 + (30% x $1000) = $800— In this example, Corporation C’s share of the limitation is $480 ($800/$1,000 x $600)Separate company limitation— Corporation C’s separate limitation is $120 ($0 + (30% x $400))

Consolidated rules vs. Separate


State conformity to post-reform IRC §163(j) as of February 25, 2019

Conformity starting in TY2019

Decouples starting in TY2020

VA- conforms to 163(j) but allows a 20% subtraction for disallowed interest

Conform – rolling or fixed to a post-reform date

Has not updated conformity or has selective conformity and does not adopt

Decouple – specifically decoupled from post-reform 163(j)

Decouple – updated fixed conformity but not for 2018 aspects of tax reform

No general corporate income tax

Alaska

District of Columbia

Hawaii


GILTI

Global Intangible Low-Taxed Income – GILTI— Under the GILTI regime, earnings of certain CFCs that are considered “non-routine” are included on

a current basis in the income of the U.S. shareholder of the subsidiary and taxed at a reduced rate, regardless of whether the amounts are actually paid to the U.S. shareholder.

— GILTI will be treated “as if” it were subpart F for purposes of certain code sections, but it does not constitute subpart F income.

What are the state issues?— Does the state conform to new IRC section 951A?

— Is any GILTI included in the state tax base?

— If included in the state tax base, does GILTI receive receipts factor representation?

— How is GILTI sourced if included in the receipts factor?

— Is there any other means of excluding GILTI?

— Is there a foreign commerce clause argument that the income should be excluded or that factor relief is needed?

— How does the GILTI deduction work for state purposes?

— If there is an exclusion for GILTI, will the taxpayer still get the IRC section 250 deduction?

— The same issue will present itself with the deduction being allowed under IRC section 250 to reduce the tax rate on Foreign Derived Intangible Income (FDII)

Tax reform impact


State taxation of GILTI (as of 2/25/19)

Not considering Foreign Commerce Clause and assuming 100 percent ownership

Tax GILTI at gross (do not allow 250)

Tax GILTI at net (allow 250)

Does not tax GILTI

Has not updated conformity; does not adopt 2018 changes, or has selective conformity and does not adopt

No general corporate income tax

Alaska

District of Columbia

Hawaii

Subject to 85% exclusionSubject to 80% DRD Subject to 70% DRD

Unless recipient is domiciled in OK

Starting with 2019 tax years

CT: Subject to a 5% expense addback

KY: Subject to expense addback

CO foreign income subtraction may not result in 100% exclusion of GILTI

NC: “net of related expenses”

Subject to 50% DRD

MA: Subject to 95% DRD

PA- Subject to DRD based on ownership


State responses

Georgia— HB 918 (enacted 3/2/2018) and SB 328 (enacted 3/26/2018) – HB 918 specifically

included IRC section 951A in taxable income, and permitted a IRC section 250 deduction. However, SB 328 reversed this and treats amounts included under IRC section 951A as Subpart F income eligible for a foreign dividends-received deduction (the IRC section 250 deduction is only permitted to the extent it relates to income included in Georgia taxable income)

Idaho— HB 463 (enacted 3/12/2018) – Requires the addback of amounts deducted under IRC

section 250Wisconsin — AB 259 (enacted 4/3/2018) – For tax years beginning after December 31, 2017,

Internal Revenue Code means the Code as amended to December 31, 2017, with numerous exceptions.

GILTI


GILTI

Technical Bulletin 85(R) (N.J. Div. of Tax Dec. 24, 2018)— New Jersey recently issued guidance on GILTI and the IRC section 250 deduction— Under P.L. 2018 c. 131, New Jersey enacted a provision allowing taxpayers to take the

IRC section 250(a) deduction— The section 250(a) is limited to taxpayers:— That include GILTI and FDII income on both its federal and New Jersey CBT returns

AND— Took the section 250(a) deduction for federal purposes— Thus, if a taxpayer is not allowed a 250(a) deduction for federal purposes, it may not

take the deduction for New Jersey CBT purposes

Tax reform impact


GILTI (continued)

Technical Bulletin 85(R) (N.J. Div. of Tax Dec. 24, 2018)— GILTI and FDII are sourced under “all other business receipts” pursuant to N.J.S.A.

54:10A-6(B)(6)— All corporation business taxpayers filing either a CBT-100 or BFC-1 must use a

separate special accounting method to determine the portion of GILTI and FDII subject to New Jersey tax

— The relevant allocation factor is equal to the ratio of New Jersey’s gross domestic product (GDP) over total GDP of every state (and D.C.) in which the taxpayer has economic nexus- GDP amounts should be based on the most recent quarterly data published by the

U.S. Bureau of Economic Analysis- Assuming economic nexus in all states, the current ratio of New Jersey GDP for

allocation purposes is 3.1%— The Division of Taxation plans to create regulations addressing the sourcing of GILTI,

FDII, and the 250(a) deduction

Tax reform impact

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