In this section, we provide a summary of brief updates from the previous quarter on legislative, judicial, and administrative developments in tax that may impact Japanese companies operating in the United States.
Proposed regulations (REG-104390-18) relating to the "global intangible low-taxed income" (GILTI) provisions under the new U.S. tax law were published this week in the Federal Register.
Read text of the proposed regulations [PDF 389 KB] (40 pages)
The following discussion provides initial impressions and observations about the proposed regulations under the GILTI provisions.
The proposed GILTI regulations were shorter than many anticipated because Treasury and the IRS limited the scope to address primarily the calculation of the GILTI inclusion amount.
Among those things not addressed in the proposed regulations are:
However, the preamble clarifies an outstanding issue by indicating that "[i]t is anticipated that the proposed regulations relating to foreign tax credits will provide rules for assigning the section 78 gross-up attributable to foreign taxes deemed paid under section 960(d) to the separate category described in section 904(d)(1)(A)."
TaxNewsFlash - October 12, 2018
[Related article (September 13, 2018)]
Proposed regulations under GILTI provisions (text of regulations)
The U.S. Treasury Department and IRS this afternoon released proposed regulations as guidance relating to the "global intangible low-taxed income" (GILTI) provisions under the new U.S. tax law.
A related IRS release (IR-2018-186) states that:
Treasury and IRS have requested comments on these proposed regulations.
New Jersey's governor on October 4, 2018, signed the following legislation:
The legislation includes measures to revise the effective dates for mandatory combined reporting and market-based sourcing; dividends-received deduction changes; related-party expense addback changes; rules concerning the taxation of GILTI and FDII-determined amounts of income; and maximum tax rules under combined reporting.
The legislation also represents the state's legislative response to the decision of the U.S. Supreme Court in South Dakota v. Wayfair, Inc. by establishing an economic nexus threshold for remote sellers and by imposing a requirement on certain electronic and physical marketplaces to collect sales tax on sales that they facilitate. The measures are effective November 1, 2018.
The IRS today released an advance version of Notice 2018-76 as guidance on the deductibility of expenses for certain business meals under section 274 as amended by the new U.S. tax law.
Notice 2018-76 [PDF 35 KB] explains that the new tax law (Pub. L. No. 115-97, enacted December 22, 2017) amended section 274 to generally disallow a deduction for expenses for entertainment, amusement, or recreation. The new tax law, however, did not specifically address the deductibility of expenses for business meals.
Notice 2018-76 provides:
TaxNewFlash No. 2018-408 (PDF)
On December 22, 2017, H.R. 1 (originally known as the Tax Cuts and Jobs Act of 2017) was signed into law (the "Act"). As part of the Act, Code section 163(j) was amended to create a broad deferral/disallowance regime with respect to the deductibility of "business interest expense." Judging by the numerous drafting mistakes that the IRS has all but acknowledged, it appears that new section 163(j) was rushed into law without a full and careful review. Thus, it will be the job for years to come of the IRS, the courts, and tax practitioners to grapple with and work out the numerous problems and mistakes of the new statute.
Section 163(j) was amended by the Act to provide new rules limiting the deduction of "business interest expense" ("BIE") for tax years beginning after December 31, 2017. Section 163(j) now provides that a taxpayer (including individuals and corporations) generally will be prohibited from deducting BIE in excess of the sum of its:
BIE is interest expense, and BII is interest income, that are properly allocable to a "trade or business," but not investment interest expense or income under section 163(d).
Any disallowed interest may be carried forward indefinitely. However, unlike old section 163(j) (which allowed the carryforward of unused excess limitation, see below), unused ATI may not be carried forward to increase the ATI of the taxpayer in a subsequent tax year.
B. Carryforwards under Old Section 163(j)
Prior to the Act, section 163(j) disallowed a deduction for disqualified interest paid or accrued by a corporation in a tax year if two threshold tests were satisfied. The first threshold test was satisfied if the payor's debt-to-equity ratio exceeded 1.5 to 1.0. The second threshold test was satisfied if the payor's net interest expense exceeded 50 percent of its adjusted taxable income (generally, taxable income computed without regard to deductions for net interest expense, net operating losses, domestic production activities under section 199, depreciation, amortization, and depletion).
Clearly, new section 163(j) would not permit the use of any "excess limitation carryforwards" from pre- Act years to post-Act years as new section 163(j) expressly limits the use of BIE to 30 percent of the current ATI of the taxpayer. But upon enactment the question arose, what happens to the interest expense carried forward under prior section 163(j) to post-Act years?
On April 2, 2018, the IRS issued Notice 2018-28 (the "Notice") which stated that Treasury and the IRS intend to issue regulations clarifying that taxpayers with disqualified interest disallowed under prior section 163(j) for the last tax year beginning before January 1, 2018, "may carry such interest forward as business interest to the taxpayer's first tax year beginning after December 31, 2017." Also, the regulations will clarify that the interest carried forward will be subject to potential disallowance under new section 163(j) "in the same manner as any other business interest otherwise paid or accrued" in a tax year beginning after December 31, 2017.
1. Investment Interest
Section 163(j) applies only to the deduction of "business interest," which is defined as, "any interest paid or accrued on indebtedness properly allocable to a trade or business." It does not include "investment interest (within the meaning of subsection (d))." Section 163(d)(3)(A) defines "investment interest" as "any interest allowable as a deduction under this chapter…which is paid or accrued on indebtedness properly allocable to property held for investment."
Consider a corporation that pays interest on indebtedness properly allocable to property held for investment. Should this interest be subject to the interest limitation rule of section 163(j) or would it escape the limitation, as it is not business interest? Although the limitations of section 163(d) on the deductibility of investment interest do not apply to corporations, section 163(d) makes no affirmative reference as to whether it is possible for corporate taxpayers to have "investment interest" and section 163(j) provides no express provision addressing this question.
2. Consolidated Groups
The Notice states that Treasury and the IRS intend to issue regulations clarifying that the limitation in section 163(j)(1) on the amount allowed as a deduction for business interest applies at the level of the consolidated group and therefore, for example, it is the group's ATI and the group's interest expense and income (ignoring intercompany liabilities) that is used in applying section 163(j).
3. Earnings and Profits
The Notice also states that Treasury and the IRS intend to issue regulations clarifying that the disallowance and carryforward of a deduction for a C corporation's BIE under section 163(j) will not affect whether or when the BIE reduces earnings and profits (E&P) of the payor C corporation. Indeed, this was the approach taken under proposed section 1.163(j)-1(e) and 1.163(j)-8(g) for prior section 163(j).
D. Electing Real Estate Trade or Business
A taxpayer may elect to be excluded from the interest deduction limitations of section 163(j) if the taxpayer is engaged in a "real property trade or business" under section 469(c)(7)(C). If the election is made it is irrevocable. While this election can yield significant benefits to a taxpayer, there is a price to pay for it—if a taxpayer makes the election, the taxpayer must depreciate nonresidential real property, residential rental property, and qualified improvement property under the ADS recovery period, i.e., longer lives and slower depreciation. For example, residential rental property placed in service before 2018 would convert to an ADS life of 40 years. Thus, when determining whether to make the election, taxpayers engaged in a real property trade or business will have to weigh the benefit of no section 163(j) interest limitation versus the cost of slower depreciation deductions.
The election to opt out of section 163(j) for taxpayers engaged in a real property trade or business may provide taxpayers with interesting planning alternatives, assuming there are sufficient business purposes to support the planning.
E. Interest Equivalents
Section 163(j) literally only applies to "interest," thereby creating an opening for taxpayers to avoid the limitations of section 163(j) by incurring liabilities that accrue expense and deductions that are not literally interest. A simple example would be using a securities loan to generate cash proceeds, and to pay deductible "substitute payments" with respect to the securities loan.
The IRS today released an advance version of Notice 2018-75 as guidance concerning the tax treatment of employer reimbursements of "qualified moving expenses."
Before the new U.S. tax law, reimbursements made by employers for the qualified moving expense of their employees generally were excludable from an employee’s gross income and from wages for employment tax purposes. The new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017) suspended the exclusion from gross income and from wages for employment tax purposes for qualified moving expense reimbursements for years 2018-2025. [The exclusion was preserved for members of the U.S. Armed Forces and their family members.] The suspension of the income and wage exclusion is effective for tax years beginning after December 31, 2017.
Notice 2018-75 [PDF 47 KB] specifically addresses employer reimbursements made in tax years beginning after December 31, 2017, for qualified moving expenses incurred in connection with a move that occurred before 2018. The IRS notice states that reimbursements received after 2017 for a move made before 2018 will not be subject to the suspension of the income exclusion.
To qualify, the reimbursements or payments must be for work-related moving expenses that would have been deductible by the employee if the employee had directly paid them prior to January 1, 2018. Also, the employee must not have deducted the expenses in 2017.
The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-130244-17) that would remove from the final regulations under section 385, the documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes—referred to as the "documentation regulations." As such, the proposed regulations would affect corporations that issue indebtedness to related corporations or partnerships.
The proposed regulations [PDF 256 KB] also provide conforming amendments to other final regulations to reflect the proposed removal of the documentation requirements. Comments and requests for a public hearing must be received by 90 days after the publication of these proposed regulations in the Federal Register (scheduled for Monday, September 24, 2018).
The purpose of this report is to provide text of the proposed regulations.
Final regulations under section 385 were promulgated in October 2016. In general, as part of the final regulations, the "documentation regulations" (that is, certain portions of the regulations relating to the documentation necessary to determine whether an interest in a corporation is treated as stock or indebtedness) were to apply to interests issued, or deemed issued, on or after the date the proposed regulations were finalized.
State governments have continued to issue guidance or statements after the U.S. Supreme Court's decision in "South Dakota v. Wayfair, Inc." as to how the states will apply the decision.
In Wayfair, the U.S. Supreme Court overruled the physical presence nexus standard of Quill and National Bellas Hess with respect to state and local taxation of remote sales. Soon after the Supreme Court issued its decision in Wayfair, various states began issuing guidance or statements or began steps to introduce legislation in response to the decision in the Wayfair case.
More states have responded to the Court's decision or have updated their initial response to the decision.
[Related article: (August 20, 2018)]
Two more states respond to "Wayfair" decision (NJ, SC)
Two more U.S. states—New Jersey and South Carolina—responded to the U.S. Supreme Court's decision.
[Related article: (August 13, 2018)]
More states respond or update initial reactions to "Wayfair" decision (AR, CA, LA, ME, MD, MS, NC, SD, WY)
More states have responded to the Court's decision or have updated their initial response to the decision.
The IRS has posted a draft version of Form 8991 concerning the "base erosion and anti-abuse tax" (BEAT) reporting for 2018.
In an effort to "level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies," the new U.S. tax law (Pub. L. No. 115- 97, enacted December 22, 2017) created a new base erosion-focused minimum tax— the base erosion and anti-abuse tax (BEAT)—that in many instances would significantly curtail the U.S. tax benefit of cross-border related-party payments made by large multinational entities. The BEAT includes within its scope almost every outbound payment made by corporations subject to the rule, except for payments treated as costs of goods sold (COGS) or otherwise as reductions to gross receipts (subject to regulatory authority from the Treasury Secretary for anti-avoidance regulations). This limited exception is unavailable for taxpayer groups that "invert" after November 9, 2017. Other than for such inverted groups, the BEAT does not apply, for example, to payments for inventory manufactured outside the United States.
Read the draft version of Form 8991 [PDF 162 KB], Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts
The draft version of Form 8991 has a "watermark" date of September 5, 2018, and includes cautionary language that it is not to be used for filing purposes, and is subject to change and to OMB approval before being officially released.
The IRS posted an "early draft release" of two forms that, if finalized, would be used to report information about the "transition tax" imposed under section 965.
Section 965 was added to the Code by the new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017) as a transition rule to effect the participation exemption regime. The transition rule includes a participation exemption, the net effect of which is to tax a U.S. shareholder's "mandatory inclusion" amount at a rate of 15.5% to the extent it is attributable to the shareholder's aggregate foreign cash position or otherwise at a rate of 8%.
The draft forms reflect a "watermark" date of August 30, 2018, and include cautionary language that they are not to be used for filing purposes, and are subject to change and to OMB approval before being officially released.
The IRS released Notice 2018-68 as initial guidance on the application of section 162(m)—as amended by the new U.S. tax law—concerning the allowable deduction for remuneration paid by any publicly held corporation with respect to a "covered employee." The notice provides a transition rule applicable to certain outstanding arrangements (referred to as the "grandfather rule"). Note, the definition of a "publicly held corporation" is expanded to include all domestic publicly traded corporations and all foreign companies publicly traded through ADRs.
The IRS: (1) published a new "frequently asked question" (FAQ) as guidance for qualified intermediaries / withholding foreign partnerships / withholding foreign trusts (QI/WP/WT); and (2) issued a reminder to all QI/WP/WT entities with a certification period ending in 31 December 2017 to log into the QI/WP/WT Application and Account Management System to select the periodic review year of their certification period by 1 September 2018.
TaxNewsFlash – August 21, 2018
The U.S. Treasury Department and IRS on August 3, 2018, released for publication in the Federal Register proposed regulations (REG-104397-18) implementing changes to the additional first-year depreciation deduction ("bonus depreciation") that were enacted as part of the new tax law in the United States, Pub. L. No. 115-97 that is sometimes referred to as the Tax Cuts and Jobs Act ("Act").
The proposed regulations clarify a number of areas that were left unclear from the statute, including when qualified property is "acquired," when "used" property will be eligible for bonus deprecation, and how the new rules apply in the context of partnership items, such as those arising in the context of sections 704(c), 732, 734(b), and 743(b).
The U.S. Treasury Department and IRS on August 1, 2018 released proposed regulations (REG104226-18) relating to the "transition tax" under section 965—as added to the Code by the new tax law (Pub. L. No. 115-97) enacted in December 2017.
Section 965 imposes a transition tax—one that requires a mandatory deemed repatriation of previously untaxed earnings. Under this provision, a 15.5% rate applies to earnings attributable to liquid assets, and an 8% rate applies to earnings attributable to illiquid assets.
According to a related IRS release (IR-2018-158), taxpayers may generally elect to pay the transition tax in installments over an eight-year period under section 965(h). The proposed regulations contain detailed information on the calculation and reporting of a United States shareholder’s section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under section 965.
For more information, please contact:
Tai Kimura | +1 408 367 2204 | email@example.com
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.