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CBIZ & MHM Executive Education Series™
Key International Tax Considerations in the Fourth Quarter Don Reiser & Laura Plotner January 10 & 17, 2017
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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide
A member of Kreston International A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
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Before We Get Started…
• To view this webinar in full screen mode, click on view options in the upper right hand corner.
• Click the Support tab for technical assistance.
• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
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CPE Credit
This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
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Disclaimer
The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
CBIZ & MHM 6
Don Reiser serves as the National Leader of the International Tax
Practice for CBIZ. He has more than 30 years experience providing
international tax consulting services to public and privately-held U.S. and
foreign-based corporations as well as foreign individuals and businesses
investing in the United States. Working closely with clients that span a
variety of industries, Don addresses a broad range of domestic and
foreign tax matters.
212.790.5724 • [email protected] Don Reiser
Managing Director
Presenters
CBIZ & MHM 7
Presenters
Laura provides tax compliance and consulting services on a full range of
tax issues. In addition to traditional tax engagements, her experience
includes specific experience in multi-state issues, international tax
services and working with public/SEC clients. She specializes in
organizational and transactional planning related to state, local and
international matters.
727.572.1400 • [email protected]
Laura Plotner Managing Director
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Agenda
Legislative
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Administrative
Treaties
Questions
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KEY INTERNATIONAL TAX CONSIDERATIONS IN THE FOURTH QUARTER
LEGISLATIVE
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International Tax Proposals
Trump Tax Plan House GOP Tax Reform Blueprint
Tax Reform Act of 2014
International Regime
• No changes specified to current worldwide tax regime
• 2015 plan would retain worldwide regime and foreign tax credits but repeal deferral
• Territorial (via 100% dividend exemption)
• Eliminate most subpart F rules; retain foreign personal holding company rules
• Provides U.S. corp shareholders 95% DRD for foreign source dividends received from 10% + owned foreign corporation
• 15% minimum worldwide effective rate on foreign base company intangible income
• 12.5% minimum worldwide effective rate on foreign base company sales income
Deemed Repatriation
• 10% tax rate • Differential rates for cash (8.75%) and noncash (3.5%) assets, payable over 8 years at taxpayer’s election
• Differential rated for cash (8.75%) and noncash (3.5%) assets, payable over 8 years (no interest charge; FTCs and NOLs may offset tax)
Border-Adjusted Tax
Base
• No proposal • Tax imposed on imports, but not exports
• No proposal
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Trump Tax Plan
• September 2015 plan would tax foreign earnings of U.S. companies on a current basis (i.e., eliminate deferral) • This would be counter to Trump’s other proposed measures
to make U.S. corporations more competitive on the global market, such as lowering the corporate tax rate
• None of the major U.S. trading partners tax the worldwide income of their domestically headquartered companies
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House GOP Blueprint - Cash-Flow Tax Approach
• The House GOP blueprint’s border adjusted cash-flow tax approach has similar elements to that of a consumption-based tax
• “Border adjustments” are a feature of a destination based value-added tax (“VAT”) whereby the tax is rebated when a product is exported to a foreign country and is imposed when a product is imported from a foreign country
• The GOP destination-based cash flow tax is similar to a VAT in many respects and may generally operate as follows: • Revenue from exported sales or services would not be taxable • The cost of imports would potentially not be deductible against
its corporate tax base • The House GOP Blueprint proposes that its cash-flow base
approach is consistent with WTO rules regarding indirect taxes
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ADMINISTRATIVE
KEY INTERNATIONAL TAX CONSIDERATIONS IN THE FOURTH QUARTER
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Final 385 Regulations - Overview
• Section 385 provides IRS with authority to issued regulations to determine whether an instrument is debt or equity (in whole or part) for U.S. tax purposes
• Proposed regulations issued on April 4, 2016
• Issued at the same time as temporary regulations addressing inversion transactions, but much broader in scope
• Significant pressure to withdraw or narrow scope
• On October 13, 2016, final and temporary regulations were issued • Eliminated bifurcation rule in proposed regulations • Significantly narrowed scope of proposed regulations • Added important exceptions • Reserved on certain aspects • Effective date changes
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Final Section 385 Regulations - Scope
• Scope of Final Regulations • Applies to debt issued by a U.S. corporation and held by a member of
the U.S. corporation’s “expanded group”(EG) • EG includes all corporations connected to a common parent
corporation that owns, directly or indirectly, at least 80% (by vote or value) of each such corporation
• Includes a partnership in which 80% or more of the interests are owned, directly or indirectly, by one or more EG members
• Exclusions - foreign issuers, debt between members of the same U.S. consolidated group, S corporations, non-controlled RICs and REITs
• Generally limits application to debt issued by U.S. corporations to foreign affiliated EG member
• Two Main Elements - Documentation Requirements and Recharacterization Rules
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Final Section 385 Regulations - Documentation Rules
• Contemporaneous documentation requirements must be satisfied in order to treat certain related-party debt issued by U.S. corporation as debt for U.S. federal income tax purposes
• Failure to comply with any of the documentation requirements generally results in equity treatment • However, failure to comply only creates rebuttable presumption of equity
treatment if issuer is otherwise highly compliant with requirements • Reasonable cause exception • Exception for ministerial failure corrected prior to IRS discovery
• Only applies to large taxpayer groups • The stock of any member of the EG is publicly traded • The total assets of the EG, as reflected on financial statements, exceed $100
million, or • The total annual revenue of the EG, as reflected on financial statements,
exceeds $50 million
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Final Section 385 Regulations - Documentation Rules
• Written documentation must establish: • Issuer’s legally binding obligation to pay a sum certain on demand or one or
more fixed dates • The holder’s rights to enforce the obligations • A reasonable expectation that the issuer intends to, and is able to repay, the
debt • The existence of an ongoing genuine debtor-creditor relationship (i.e., evidence
of timely interest and principal payments or evidence of actions taken to enforce creditor’s rights upon failure to make required payments or default)
• Satisfying documentation rules does not automatically ensure debt characterization - common law rules apply • Four documentation factors are “significant factors” in making debt/equity
determination; all other factors treated as lesser factors
• New rules to satisfy documentation requirements with respect to credit facilities, revolvers, cash pooling arrangements
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• Documentation must be prepared no later than the time the issuer is required to file its federal income tax return (with extensions) • Consistent with U.S. transfer pricing documentation
• Applies only to debt instruments issued on or after January 1, 2018 • No distinction between fiscal year and calendar year filers
Final Section 385 Regulations - Documentation Rules
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Final Section 385 Regulations - Recharacterization Rules
• Automatically treat as stock a debt instrument issued by a U.S. corporation to a foreign (or non-consolidated) member of the issuer’s EG that otherwise would be treated as debt for U.S. federal income tax purposes if issued in certain transactions • Recharacterized debt instrument treated as stock for all U.S. tax
purposes • General Rule
• Debt instrument issued by a U.S. corporation to an EG member is recharacterized as stock if issued in any of the following situations: • In a distribution with respect to the issuer’s stock (e.g., dividend
distribution in form of a note) • In exchange for stock of an EAG member (e.g., note issued in a
Section 304 transaction) • In exchange for property in an asset reorganization (e.g., note issued
as boot in a “D” reorganization)
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Final Section 385 Regulations - Recharacterization Rules
• Funding Rule • Debt instrument issued by a U.S. corporation to an EG member is
recharacterized as stock if issued with a “principal purpose” of funding any of the three transactions described in the General Rule
• Principal purpose generally determined based on facts and circumstances
• However, a debt instrument issued by a U.S. corporation within 36 months before or after one of the transactions described in the General Rule is per se treated as issued with a principal purpose of funding such transaction
• Exceptions to General Rule and Funding Rule • Rules do not apply to distributions or acquisitions that do not exceed
the “expanded group earnings account” of the U.S. issuer • Debt instrument is not treated as stock to the extent that the total
amount of debt held by EG members that would otherwise be treated as stock under the General Rule or the Funding Rule does not exceed $50 million
• Limited exception for qualified contributions
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Final Section 385 Regulations - Recharacterization Rules
• Qualified short-term debt • Certain other exceptions
• Generally applies to taxable years ending or after January 19, 2017, in respect of debt instruments issued after April 4, 2016 • Recharacterization of any debt issued between April 4, 2016 and
January 19, 2017 would be effective January 20, 2017 • However, payments on such recharacterized debt are treated as
distributions under the Funding Rule
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Final Section 385 Regulations
• State and local tax implications
• Unclear how states will address
• U.S. corporations could be subject to state documentation and/or reclassification rules even if exempt for federal tax purposes
• Future of final regulations uncertain
• Possible withdrawal of regulations by Trump Administration
• Impact of U.S. tax reform
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• Background • Section 367(a) taxes gain on otherwise tax-free transfer of property by
U.S. person to a foreign corporation in a Section 332, 351, 354, 356 or 361 exchange
• Section 367(a)(3) exception for property transferred for use in active business outside the U.S. - but does not apply to “intangible property” described in Section 936(h)(3)(B)
• Section 367(d) provides special rule for outbound transfers or Section 936(h)(3)(B) intangibles to a foreign corporation under Sections 351 or 361 • Section 367(a) not apply • U.S. transferor treated as selling the intangible property for annual
payments contingent upon productivity of the property - deemed royalty income over useful life, not to exceed 20 years
• Transfer of foreign goodwill or going concern value not subject to Section 367(d) under Temporary Regulations
• IRS primary concerns
Final Section 367(d) Regulations
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• On December 15, 2016, final Section 367(d) regulations were issued - largely adopting 2015 proposed regulations
• Removes the exception for foreign goodwill and going concern value in the Temporary Section 367(d) regulations
• Significantly limits the active trade or business exception under Section 367(a) to “eligible property,” which includes only the following three classes of assets used in the active conduct of a trade or business outside the U.S. • Tangible property • Working interests in oil and gas property • Financial assets (cash and cash equivalents, securities, commodities and
notional principal contracts) • Intangible property (including foreign goodwill and going concern value) is
not eligible property
Final Section 367(d) Regulations
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• Effect is that foreign goodwill and going concern value will be subject to tax under either Section 367(a) or 367(d) • Regulations not address whether foreign goodwill or going
concern value is a Section 936(h)(3)(B) asset - left to taxpayers to decide how to classify
• If described in Section 936(h)(3)(B), then Section 367(d) applies
• If not, then Section 367(a) applies • Therefore, either immediate gain and tax in year of transfer
under Section 367(a) or annual inclusion over the useful life of the property under Section 367(d)
Final Section 367(d) Regulations
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• Taxpayers can elect, in year of transfer, to take into account the Section 367(d) inclusions for only a 20-year period in the case of long-lived property • However, taxpayers that choose to limit Section 367(d) inclusions
to a 20-year period must include during that period amounts that reasonably reflect amounts that would be required to be included over the useful life of the transferred property in the absence of this limitation (i.e., following the end of the 20-year period)
• Retained retroactive effective date of proposed regulations - effective for transfers after September 14, 2015
Final Section 367(d) Regulations
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• Final and temporary regulations issued under Section 987 on December 7, 2016
• Final regulations clarify treatment of income earned through a qualified business unit (QBU) that operates with a functional currency different than its owner
• Unrealized Section 987 gains and losses existing as of the transition date for the new regime will disappear under a mandatory “fresh start” transition method
• New limitations restrict a taxpayer’s ability to cause the recognition of Sec. 987 losses through terminations of QBUs
Final Section 987 Regulations
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Final Section 987 Regulations - Transition Rules
• Taxpayers are required to adopt the new regulations beginning in calendar year 2018
• Taxpayers may elect to adopt the regulations beginning in 2017 • Under the “fresh start” transition method, all Section 987
QBUs that have not already implemented the 2006 proposed regulations will be deemed to terminate on the day before the new regime’s adoption
• No Section 987 gains or losses will be recognized on those transactions
• Therefore, many pre-existing Section 987 losses will be eliminated without producing a tax benefit
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Final Section 987 Regulations - Transition Rules
• Where a QUB’s assets are transferred to a successor QBU owned by the same controlled group in defined “deferral transactions”, both Section 987 gains and losses of the transferor can be deferred until the successor QBU makes remittances to its owner
• The recognition of Section 987 losses can no longer be accelerated by a contribution of assets of the QBU by one member of a U.S. consolidated group to another member of the group
• Section 987 losses are disallowed when a QBU’s assets are transferred by a U.S. owner to a foreign corporation that is a member of the same controlled group. The disallowed loss can increase the basis of the shares received in exchange for the transfer
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Country-by-Country Reporting
• On June 29, 2016, final regulations were issued implementing new country-by-country reporting requirements, under which the ultimate parent entity of a multinational enterprise group (MNE group) with revenue of $850 million or more in the preceding annual accounting period must file Form 8975, Country-by-Country Report
• The regulations require an MNE group to report on a country-by-country basis income and taxes paid, together with certain indicators of the location of economic activity within the MNE group, for each constituent entity
• The form is still under development • These regulations will apply to tax years beginning in 2017
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Final Subpart F Regulations on Active Rents and Royalties Exception
• Section 954(c) exempts from Subpart F income rents and royalties received from unrelated persons if derived in the active conduct of a trade or business
• On November 2, 2016, final regulations were issued addressing qualification for active rents and royalties exception under “active development” and “active marketing” tests
• Creating consistently with active marketing test, the regulations require that only activities performed by “employees” of the CFC lessor or licenser are taken into account under active development test • No attribution to CFC of activities undertaken by others
(e.g., contract developers)
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• Active marketing test can be met by CFC employees in multiple countries
• Cost sharing transaction payments and platform contribution transaction payments are not considered active leasing or licensing expenses
• Effective for rents or royalties received or accrued in taxable years ending on or after September 1, 2015
Final Subpart F Regulations on Active Rents and Royalties Exception
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Final Section 956 Regulations
• On November 2, 2016, final regulations were issued addressing Section 956 treatment of loans from a CFC to a foreign partnership, partnership property indirectly held by a CFC partner and the Section 956 anti-avoidance rule
• Obligations of Foreign Partnerships • Apply an aggregate approach to treat the obligation of a foreign partnership as
an obligation of its partners to extent of each partner’s share of the obligation - determined in accordance with partner’s liquidation value percentage
• Rule applies regardless of how the loan proceeds are used by the foreign partnership
• Exception for obligations of a partnership in which neither the lending CFC nor a person related to the lending CFC is a partner
• Partnership Property Indirectly Held by CFC Partner • CFC partner in partnership treated as holding its attributable share of
partnership property - determined in accordance with partner’s liquidation value percentage
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Final Section 956 Regulations
• CFC partner’s adjusted basis in partnership property equals the partner’s attributable share of the partnership’s adjusted basis in the property - also determined in accordance with CFC partner’s liquidation value percentage
• Anti-Avoidance Rule • Modify prior anti-abuse rule by providing that it could apply when a foreign
corporation controlled by the CFC is funded by any means - not just by capital contributions or debt
• Exception for common business transactions • Expanded anti-avoidance rule to apply to transactions involving partnerships
controlled by a CFC that provides funding to the partnership • Effective Dates
• Anti-avoidance rules apply to tax years of CFCs ending on or after September 1, 2015 and to tax years of U.S. shareholders in which such tax years
• Remaining rules apply to tax years of CFCs ending on or after November 3, 2016, and tax years of U.S. shareholders in which such tax years end
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• On December 27, 2016, final PFIC regulations were issued providing guidance on determining ownership of a PFIC and reporting requirements for certain shareholders
• Modify the definition of shareholder by providing that a U.S. person is not treated as a shareholder of a PFIC to the extent such person owns PFIC stock through a tax-exempt organization or account
• Provide guidance as to when a U.S. person is treated as indirectly owning stock of a foreign corporation through a U.S. corporation to prevent avoidance of PFIC rules • However, regulations contain a non-duplication rule to limit
excessive PFIC inclusions resulting from indirect ownership
Final PFIC Regulations
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Final PFIC Regulations
• Clarify that an S corporation and U.S. partnership are treated as U.S. shareholders of PFIC only for purposes of information reporting
• Exceptions from PFIC reporting under Section 1298(f) • U.S. partnership is exempt from reporting with respect to an interest in a PFIC when none
of its direct and indirect partners are subject to PFIC rules • U.S. person who owns PFIC stock through a foreign pension fund covered by a U.S. income
tax treaty is exempt from reporting, regardless of whether the pension fund is treated as a foreign trust under U.S. tax law
• Dual resident taxpayers who are treated as residents of a treaty country are exempt from PFIC reporting
• U.S. person that owned stock of a Section 1291 fund for 30 days or less and did not receive an excess distribution with respect to the fund
• Bona fide residents of Guam, Northern Mariana Islands or U.S. Virgin Islands are exempt from PFIC reporting
• U.S. persons that own PFIC stock that is marked to market under non-PFIC provisions are exempt from PFIC reporting unless they are otherwise subject to the PFIC rules
• Final regulations are generally effective for tax years ending on or after December 31, 2013
.
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Due Date Changes
Return Type Original Due Date Extended Due Date
Partnership Form 1065 (Calendar Year End)
March 15 September 15th
Partnership Form 1065 (Fiscal Year End)
15th day of 3rd month after year-end 15th day of the 9th month after year-end
Trust and Estate Form 1041
April 15th September 30th
C Corporation Form 1120 (Calendar Year End)
Before 1/1/2026 – April 15th After 12/31/2026 – April 15th
Before 1/1/2026 – Sept. 15th After 12/31/2026 – Oct. 15th
C Corporation Form 1120 (FYE other than 6/30 or 12/31)
15th day of 4th month after year-end 15th day of 10th month after year-end
C Corporation Form 1120 (6/30 FYE)
Before 1/1/2026 – Sept. 15th After 12/31/2026 – Oct. 15th
Before 1/1/2026 – April 15th After 12/31/2026 – April 15th
Form 990 May 15th November 15th
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Final Regulations on Foreign-Owned Single-Member LLC Reporting
• Section 6038A imposes reporting, recordkeeping and compliance obligations on a U.S. corporation if at least 25% of its stock (vote or value) is owned by one foreign person
• On December 12, 2016, final regulations were issued that would treat a U.S. disregarded entity wholly owned by one foreign person as a U.S. corporation, separate from its foreign owner, for the limited purpose of the Section 6038A reporting, record maintenance and associated compliance requirements that apply to 25% foreign-owned U.S. corporations
• Foreign-owned disregarded entity would be required to: • File Form 5472 for reportable transactions between the disregarded entity and its foreign
owner (or other foreign related parties) • Obtain an EIN by filing Form SS-4 and identifying the entity’s “responsible party”
• Exceptions to generally applicable record maintenance requirements (e.g., for small corporations and de minimis transactions) will not apply
• Penalties associated with failure to file Form 5472 would apply • Domestic disregarded entities will have the same tax year as their foreign owner if the foreign
owner has a U.S. return filing obligation; however, if a foreign owner has no U.S. return filing obligation, the tax year of a domestic disregarded entity will be the calendar year
• Regulations apply to tax years of the disregarded entity beginning on or after January 1, 2017, and ending on or after December 13, 2017
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KEY INTERNATIONAL TAX CONSIDERATIONS IN THE FOURTH QUARTER
TREATIES
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• 6 bilateral treaties and one multilateral treaty have been awaiting ratification by the Senate
• Senator Rand Paul continues to block consent for treaty approval. The Senator remains concerned that the standard information sharing provisions are too broad
• Income Tax Treaties pending approval: • Chile • Hungry • Poland • Vietnam
• Proposed Protocols pending approval: • Japan • Luxembourg • Spain • Switzerland
Income Tax Treaties Awaiting U.S. Senate Approval
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Ongoing Treaty Discussions and Negotiations
• Norway - negotiations completed on revised treaty, which may incorporate new restrictions on access to treaty benefits reflected in new U.S. Model Income Tax Treaty
• Ireland - negotiations to amend the existing treaty to include the new changes reflected in the U.S. Model Treaty
• Netherlands - similar to the discussions with Ireland • United Kingdom - continued discussions to issue a new
protocol to the existing tax treaty, which is also expected to incorporate aspects of the U.S. Model Treaty
• Argentina - negotiations initiated in September 2016
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Luxembourg
• The U.S. and Luxembourg announced on June 22, 2016 that they are negotiating a protocol to the existing income tax treaty that would specifically include an amendment related to permanent establishments
• The amendment will address the potential for double non-taxation for U.S. source income of a Luxembourg company that is attributable to a U.S. permanent establishment of the company
• The protocol is also expected to include a permanent establishment provision denying treaty benefits under certain “triangular branch structures” which are commonly used to avoid taxation of intercompany interest and royalty payments
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? QUESTIONS
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If You Enjoyed This Webcast…
Upcoming Courses: • 1/19 & 1/26: Fourth Quarter Accounting and Financial Reporting Issues Update
• 2/8 & 2/15: New Partnership Audit Rules – Planning Ideas and Practical Observations
• 2/9 & 2/14: Eye on Washington – Quarterly Business Tax Update
Recent Publications: • Is 2017 the Year for Comprehensive Tax Reform?
• Tax Implications for U.S. Employees Working Offshore
• Report: 2016 Tax Year-in-Review
• Does Early Adoption of an Accounting Standard Make Sense for Your Company?
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