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.
The IRS has replaced on its website a version of the final regulations under section 965, and the new version reflects changes from the version released by the IRS on January 15, 2019.
The new version of the final regulations delays the effective date for the section 965(h) election relating to "transfer agreements" until 30 days after the date when the final regulations are published in the Federal Register (rather than on January 31, 2019, as originally set forth in the January 15, 2019 version of the final regulations). This change means that taxpayers considering or in the process of filing transfer agreements now have at least an additional month of time.
Read a computer-generated document [PDF 904 KB] (an unofficial document produced by KPMG) that compares the version of the final regulations released on January 15, 2019, against the version of the final regulations that the IRS posted this week on its website. This document is intended to show what changes have been made to the final regulations. It has not been reviewed for accuracy.
Refer to pages 94-95 and 267 of the document provided above.
During the partial government shutdown, the IRS and Treasury Department posted a version of the final regulations under section 965 on the IRS website. That version (January 15, 2019) of the final regulations under section 965 included the following statement:
This document will be submitted to the Office of the Federal Register (OFR) for publication. The version of the final rule released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.
The final regulations have not yet been released for publication in the Federal Register. According to the advance version released by the IRS, these regulations will be effective on the date when they are published in the Federal Register.
TaxNewFlash 2019-046 (PDF)
The IRS Large Business and International (LB&I) division today publicly released two “practice units”—part of a series of IRS examiner "job aides" and training materials intended to describe for IRS agents leading practices about tax concepts in general and specific types of transactions.
The titles of the practice units are:
Read the practice units on the IRS practice unit webpage (posting date of January 29, 2019).
Both practice units specifically consider provisions under the income tax treaty between the United States and the United Kingdom. The first practice unit examines whether a UK company has a U.S. permanent establishment as a result of an agent concluding contracts on its behalf in the United States. The second practice unit includes a focus on determining whether an activity has a preparatory or auxiliary character for purposes of determining whether there is a permanent establishment.
TaxNewFlash 2019-041 (PDF)
The U.S. Treasury Department and IRS on January 18, 2019, publicly released a version of final regulations under section 199A.
Section 199A was enacted as part of the tax legislation in the United States that is often referred to as the “Tax Cuts and Jobs Act” (Pub. L. No. 115-97, enacted December 22, 2017).
The final regulations were posted on the IRS website in advance of being published in the Federal Register, and they finalize regulations that were proposed in August 2018 and generally apply to tax years ending after the publication of the final regulations in the Federal Register. The date when these final regulations will be published in the Federal Register is uncertain given the partial shutdown of the federal government.
KPMG LLP has prepared a report that includes:
The IRS has posted final versions of the following forms and instructions for purposes of implementing certain provisions that were enacted by the U.S. tax law (Pub. L. No. 115-97) in December 2017.
These and other forms and schedules are available on the IRS website.
TaxNewsFlash No. 201-032 (PDF)
The 116th Congress began on January 3, 2019—with Democrats controlling the House and Republicans controlling the Senate and the White House. The return to "divided government" raises a host of questions as to what to expect in the near future—including in the tax policy arena.
Today, KPMG LLP is releasing a report with preliminary observations about tax policy and prospects for tax legislation in the new Congress.
Today’s KPMG report describes the new House, the new Senate, and the tax-writing committees—and makes observations about the possible tax agenda. It also attempts to shed some light on some of the key questions tax professionals and businesses have been asking, including:
TaxNewsFlash 2019-015 (PDF)
The Office of Management and Budget (OMB) reportedly has determined that refundable alternative minimum tax (AMT) credit carryforwards are not subject to sequestration.
According to multiple reports, the OMB General Counsel (in consultation with the Treasury Department) has concluded that AMT credit carryforwards that became refundable under a provision of Pub. L. No. 115-97 (the 2017 tax law commonly referred to as the "Tax Cuts and Jobs Act") are not subject to sequestration.
Based on the OMB determination (as reported), KPMG LLP has updated Q&A 5.25, How should companies consider sequestration when accounting for AMT credit refunds resulting from tax reform?, in its booklet Tax Reform, Supplement to KPMG’s Handbook, Accounting for Income Taxes. Q&A 5.25 was updated on January 9, 2019.
TaxNewsFlash 2019-012 (PDF)
The U.S. Treasury Department and IRS released a version of proposed regulations (REG-113604-18) as guidance under section 864(c)(8) concerning tax on the sale of U.S. trade or business partnership interests on a look-through basis.
Section 864(c)(8) was added to the Code by the new U.S. tax law (Pub. L. No. 115-97, date of enactment December 22, 2017)—the law that is at times referred to as the "Tax Cuts and Jobs Act" (TCJA).
Read the proposed regulations [PDF 150 KB] (36 pages)
This report provides initial impressions about the proposed regulations.
The IRS in 1991 issued Rev. Rul. 91-32 and concluded that a foreign partner's capital gain or loss on the sale of a partnership interest is properly treated as effectively connected with a U.S. trade or business if and to the extent that a sale of the underlying assets by the partnership would have resulted in effectively connected income for the foreign partner.
In 2017, the U.S. Tax Court in Grecian Magnesite Mining v. Commissioner refused to follow the revenue ruling in determining that a foreign partner was not subject to U.S. tax on a sale of a partnership interest (to the extent the gain was not attributable to U.S. real property interests).
In response, section 864(c)(8) was enacted in the 2017 tax law to provide that gain or loss on a sale of a partnership interest by a foreign person is treated as effectively connected with a U.S. trade or business to the extent that the foreign person would have had effectively connected gain or loss had the partnership sold its underlying assets.
A separate provision of the new law—section 1446(f)—requires that the transferee of a partnership interest withhold 10% of the amount realized on a sale or exchange of the interest unless the transferor certifies that it is not a foreign person and provides a U.S. taxpayer identification number. If the transferee fails to withhold the correct amount, the new law imposes an obligation on the partnership to deduct and withhold from distributions to the transferee partner an amount equal to the amount the transferee failed to withhold, plus interest.
In December 2017, the IRS released Notice 2018-08 (the "PTP Notice"). The PTP Notice temporarily suspends the requirement to withhold on amounts realized in connection with the sale, exchange, or disposition of certain interests in publicly traded partnerships. Read TaxNewsFlash
In April 2018, the IRS released Notice 2018-29 that announced an intent to issue proposed regulations under section 1446(f) that apply in the case of a disposition of a partnership interest that is not publicly traded and provided temporary guidance. Read TaxNewsFlash
The staff of the Joint Committee on Taxation (JCT) today released its 457-page general explanation of Pub. L. No. 115-97, commonly referred to as the "Tax Cuts and Jobs Act" (TCJA).
The JCT report is referred to as the "Bluebook," but is officially titled: General Explanation Of Public Law 115-97 (JCS-1-18).
The introduction to the Bluebook states:
This document, prepared by the staff of the Joint Committee on Taxation in consultation with the staffs of the House Committee on Ways and Means, the Senate Committee on Finance, and the Treasury Department's Office of Tax Policy, provides an explanation of Public Law No. 115–97 (also referred to as the "Act" throughout).
The U.S. Treasury Department and IRS have released proposed regulations ("Proposed Regulations") under chapters 3 and 4 of the Internal Revenue Code, containing modifications resulting from industry comments and intended to provide burden relief under chapter 4 (FATCA) and chapter 3.
The Proposed Regulations [PDF 253 KB] appear in the December 18, 2018 edition of the Federal Register.
The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG 104259-18) under section 59A—the "base erosion and anti-abuse tax" (BEAT)—as enacted as part of the new tax law (Pub. L. No. 115-97) (also referred to as the "Tax Cuts and Jobs Act").
The proposed regulations were released by the IRS on December 13, 2018, in advance of publication in the Federal Register.
KPMG LLP has prepared a 26-page report providing analysis and observations about these proposed regulations. Read KPMG report: Analysis and observations about "BEAT" proposed regulations [PDF 325 KB]
The IRS today released an advance version of Notice 2019-01 that announces that the IRS and Treasury Department plan to issue regulations addressing certain issues with respect to foreign corporations with "previously taxed earnings and profits" (PTEP).
The IRS notice explains that the future regulations will address certain issues relating to measures enacted by the new U.S. tax law (Pub. L. No. 115-97 (date of enactment December 22, 2017))—the law that is often referred to as the "Tax Cuts and Jobs Act" (TCJA).
Notice 2019-01 [PDF 85 KB]—
An IRS transmittal message states that the future regulations will include (1) rules relating to the maintenance of PTEP in annual accounts and within certain groups; (2) rules relating to the ordering of PTEP upon distribution and reclassification; and (3) rules relating to the adjustment required when an income inclusion exceeds the earnings and profits of a foreign corporation. It is anticipated that the future regulations will apply to tax years of U.S. shareholders ending after December 14, 2018 (the date of release of Notice 2019-01) and to tax years of foreign corporations ending with or within such tax years.
The purpose of this report is to provide text of the IRS notice. Initial impressions about Notice 2019-01 will be provided in a future edition of TaxNewsFlash
The U.S. Treasury Department and IRS yesterday released proposed regulations under section 59A, the "base erosion and anti-abuse tax" (BEAT) that was enacted as part of the new U.S. tax law (Pub. L. No. 115-97) (also referred to as the "Tax Cuts and Jobs Act" (TCJA)).
The proposed regulations [PDF 827 KB] (193 pages) provide guidance regarding which taxpayers will be subject to section 59A; the determination of what is a base erosion payment; the method for calculating the base erosion minimum tax amount; and the required base erosion and anti-abuse tax resulting from that calculation.
Initial impressions of BEAT proposed regulations
The IRS today posted a set of questions and answers (referred to as “FAQs”) concerning issues relating to section 965 filing and reporting requirements for 2018 tax returns.
The FAQs—Questions and Answers about Tax Year 2018 Reporting and Payments Arising under Section 965—provide answers to questions related to tax year 2018 return filing and payment obligations arising under section 965—including reporting and payment obligations resulting from amounts included in income for the 2017 tax year.
A prior version of FAQs provide answers to questions regarding tax year 2017 return filing and payment obligations arising under section 965.
This report provides brief initial impressions and observations about the new FAQs.
Initial impressions about FAQs
FAQ 1 and FAQ 2 appear to be similar to those provided in the FAQs for 2017. Section 965 payments—whether for the full amount of the 2018 inclusion, the first installment payment for 2018 inclusions for which the taxpayer makes a section 965(h) election, or the second installment payment for 2017 inclusions for which the taxpayer made the section 965(h) election—are to be paid separately from "non-section 965" liabilities. Pursuant to the new FAQs, taxpayers will have additional options for the method of payment—now including EFTPS, wire transfers, or mail. Installment payments with respect to the 2018 inclusions (but not the second installment for 2017 inclusions) may also be made using electronic funds withdrawal. The IRS will issue payment vouchers six to eight weeks in advance of the due date, informing taxpayers of the amount of their second section 965 installment payment.
Next, the FAQs provide some "bad news" and some "good news."
The IRS on November 28, 2018, released proposed regulations (REG-105600-18) relating to sections 78, 864, 901, 904, and 960—the foreign tax credit measures amended by Pub. L. No. 115-97, enacted December 22, 2017.
Read text of the foreign tax credit proposed regulations [PDF 1.8 MB] (312 pages) as published on the IRS webpage.
The following discussion provides initial impressions and observations about the proposed regulations. Read a printable version of this discussion: KPMG report: Initial impressions, foreign tax credit proposed regulations [PDF 1 MB]
KPMG hosted a webcast on December 6 that covered, in part, the proposed foreign tax credit regulations. View a replay of the webcast here.
The IRS today released an advance version of Rev. Proc. 2018-60 that taxpayers may follow to obtain automatic consent to change to a method of accounting for the timing of recognition of revenue in order to comply with section 451(b), as amended by the new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017, and referred to as the “Tax Cuts and Jobs Act” or TCJA).
Read Rev. Proc. 2018-60 [PDF 68 KB]
Code section 451(b), as amended by the TCJA, requires accrual method taxpayers to recognize amounts in revenue no later than when such an item is taken into account in the taxpayer’s applicable financial statements (AFS). The amendment applies beginning with a taxpayer’s first tax year beginning after December 31, 2017, except for provisions related to original issue discount (OID) which apply to tax years beginning after December 31, 2018.
FASB ASC 606, Revenue from Contracts with Customers, (“new standards”) provides new financial accounting standards for revenue recognition. Rev. Proc. 2018-29, as modified by Rev. Proc. 2018-49 permitted automatic method changes for taxpayers that want to change their method of accounting for the recognition of income to a method that uses the new standards under ASC 606 for identifying performance obligations, allocating transaction price to performance obligations, and/or considering performance obligations satisfied. This guidance permitted an automatic method change for the year in which ASC 606 is adopted for financial accounting purposes.
Rev. Proc. 2018-60
Rev. Proc. 2018-60 provides automatic procedures by which taxpayers may comply with the TCJA amendments to section 451. Prior to the release of this guidance, many changes to a method of accounting for the timing of recognition of revenue were treated as non-automatic method changes. The new automatic method change added by Rev. Proc. 2018-60 applies to:
Taxpayers are permitted to file a “short” Form 3115, Application for Change in Accounting Method. See Section 16.12(4)(a) of Rev. Proc. 2018-31, as modified by Rev. Proc. 2018-60 for specific information required.
A taxpayer is not required to file the duplicate copy with the IRS in Covington, KY. The eligibility requirements prohibiting a method change for the same item in five tax years ending with the year of change are waived for the first, second, or third tax year beginning after December 31, 2017 (beginning after December 31, 2018, for changes involving OID). A taxpayer wishing to make a change under these procedures and a change to adopt the new standards under Rev. Proc. 2018-29, as modified by Rev. Proc. 2018-49, is permitted to file the changes on a single Form 3115.
The Treasury Department released proposed regulations (REG-106089-18) relating to section 163(j) as amended by the new U.S. tax law, on Monday, November 26, 2018. In the following discussion, the regulations are referred to as the "Proposed 163(j) Package."
Read the text of the Proposed 163(j) Package [PDF 1.5 MB] as published on the IRS webpage.
This report provides initial impressions and observations about the Proposed 163(j) Package. Subsequent reports will contain more in-depth analysis of various aspects of the rules.
KPMG hosted a webcast on December 6, 2018, that covered, in part, the international aspects of the proposed section 163(j) rules. View a replay of the webcast here. KPMG will also host a webcast on December 20, 2018, focusing on the domestic applications of the proposed rules.
Significantly, the proposed rules do not relate back to the enactment of section 163(j). Rather, the rules would be applicable for taxable years ending after the date on which the final regulations are published in the Federal Register.
The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9843) under section 263A concerning allocation of costs to certain property produced or acquired for resale by a taxpayer under the “simplified methods.”
The final regulations [PDF 457 KB] provide:
In general, the rules under these final regulations are mandatory, and thus require manufacturers with average gross receipts of more than $50 million to change their methods of accounting if they use the simplified production method to allocate additional 263A costs currently.
Rev. Proc. 2018-56
The IRS today released an advance version of Rev. Proc. 2018-56 [PDF 203 KB] regarding procedures by which a taxpayer may obtain automatic consent to make certain method changes to conform to today’s final regulations—for instance, a change to comply with the new definition of section 471 costs or a change to the modified simplified production method (MSPM).
Rev. Proc. 2018-56 modifies Rev. Proc. 2018-31.
The final regulations are to be published in the Federal Register on November 20, 2018, and apply for tax years beginning on or after November 20, 2018.
The IRS today released an advance version of Rev. Proc. 2018-57 providing the annual inflation adjustments for more than 60 tax provisions to be used by individual taxpayers on their 2019 returns (and generally filed in 2020).
Rev. Proc. 2018-57 [PDF 123 KB] provides the tax rate schedules and other tax amounts as adjusted for inflation, and reflects changes enacted by the new tax law in the United States (Pub. L. No. 115-97, enacted December 22, 2017).
Election Day in the United States was yesterday, November 6, 2018.
All seats in the U.S. House of Representatives and just over a third of the seats in the U.S. Senate were in play. Based on election results thus far, the Democrats will control the House at the start of the next Congress, although the exact magnitude of their majority is still being determined. Meanwhile, Republicans will continue to control the Senate, having potentially increased their number of seats by an, as of yet, unresolved amount.
This report provides preliminary observations as to how yesterday’s elections could affect federal tax legislation in the next Congress, and observations regarding what might be addressed during the short "lame duck" session before the current Congress adjourns.
The big picture
As explained below, given the election results, the likelihood of substantial additional net tax cuts for upper income individuals and businesses becoming law in the near future appears low—but so too does the possibility of enactment in the next Congress of substantial changes to the massive tax legislation enacted in 2017 (such as increases in the individual and corporate rates). Nonetheless, there is still a decent chance that bipartisan consensus could be reached on some pieces of tax legislation with respect to matters such as expired provisions, retirement issues, technical corrections, and, possibly, infrastructure.
Proposed regulations (REG-114540-18) coordinating sections 956 and 245A are scheduled to appear in the Federal Register on Monday, November 5, 2018.
Read text of the proposed regulations [PDF 207 KB] as published in the Federal Register.
This report provides initial impressions and observations about these proposed regulations.
What do the proposed regulations do?
For tax years of CFCs beginning on or after the date the regulations are finalized (i.e., if finalized in 2018, the regulations will be effective for calendar year taxpayers beginning on January 1, 2019), the section 956 regulations are modified to reduce the amount of the deemed inclusion that a U.S. shareholder would otherwise take into account ("the tentative section 956 amount") by the amount of the section 245A deduction that the shareholder would otherwise be allowed if the shareholder had received a distribution from the CFC in an amount equal to the "tentative section 956 amount" (the hypothetical distribution).
A taxpayer can elect to apply the proposed regulations for tax years of CFCs beginning after December 31, 2017, provided that the taxpayer and persons related to the taxpayer consistently apply the proposed regulations with respect to all CFCs in which they are U.S. shareholders.
For example, assume a first-tier CFC loans $120 to its U.S. shareholder, and thus the "tentative section 956 amount" is $120. The amount of the section 956 deemed inclusion relating to this $120 is reduced to the extent of the "section 245A deduction" that would have arisen if the CFC had instead made a $120 dividend distribution to the U.S. shareholder.
The rules also apply for lower-tier CFCs, by treating the CFC as if it were directly owned by the U.S. shareholder and the CFC made a hypothetical distribution to the U.S. shareholder (through each entity by reason of which the U.S. shareholder indirectly owns the shares and pro rata with respect to the equity that gives rise to the indirect ownership) equal to the "tentative section 956 amount." Thus, section 956 / section 245A parity is generally restored because the U.S. shareholder can no longer get better (or worse) treatment by making a section 956 investment.
The U.S. Treasury Department and IRS today released proposed regulations (REG-114540-18) concerning the amount determined under section 956 for corporate United States shareholders.
The proposed regulations [PDF 108 KB] reduce the amount determined under section 956 with respect to certain domestic corporations that own (or are treated as owning) stock in controlled foreign corporations (CFCs).
As briefly explained in a related IRS release—IR-2018-210—the proposed regulations reflect changes made by the new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017).
The new tax law added a participation exemption system for the taxation of certain foreign income. Today’s proposed regulations are intended to provide that the application of section 956 is consistent with the new participation exemption system.
The proposed regulations are pending release for publication in the Federal Register.
The purpose of this report is to provide text of the proposed regulations. A discussion of initial impressions about these proposed regulations will be provided in a future report from KPMG.
Proposed regulations (REG-104872-18) to remove existing regulations that are no longer necessary after the enactment of the new U.S. tax law (Pub. L. No. 115-97) are included in the Internal Revenue Bulletin 2018-44 (October 29, 2018).
Read the proposed regulations [PDF 220 KB] as initially released for publication in the Federal Register earlier in October 2018.
The proposed regulations would remove existing Reg. section 1.451-5 relating to the treatment of advance payments for goods and long-term contracts and would affect accrual method taxpayers that receive advance payments for goods, including those for inventoriable goods. In general, Reg. section 1.451-5 permits taxpayers to defer the inclusion of income from advance payments for goods for federal tax purposes until the advance payments are recognized in gross receipts under the taxpayer’s method of accounting for financial reporting purposes.
Taxpayers that are presently using a method of accounting permitted by Reg. section 1.451-5 will need to make an accounting method change to a permitted method of accounting for advance payments, effective for tax years beginning after December 31, 2017.
Interim guidance has been issued under Notice 2018-35 permitting taxpayers to continue to rely on Rev. Proc. 2004-34 to make automatic accounting method changes for advance payments until guidance is issued specific to section 451(b) and 451(c).
Other changes that do not qualify under Rev. Proc. 2004-34 are generally non-automatic method changes and must be filed by the end of the year of change. It is uncertain whether Treasury and IRS will issue procedural guidance providing additional automatic accounting method changes before the end of the calendar year.
KPMG LLP today provides a report of initial impressions about the proposed regulations (REG-115420-18) that the U.S. Treasury Department and IRS released on October 19, 2018, along with a revenue ruling as guidance under section 1400Z-2— the opportunity zone measures added to the Code by the new U.S. tax law.
Read today's discussion of initial impressions: KPMG report: New rules for opportunity zones [PDF 1.3 MB]
Section 1400Z-2 relates to gains that may be deferred as a result of a taxpayer’s investment in a qualified opportunity fund (QOF), and was added to the Code by the new tax law (Pub. L. No. 115-97 enacted December 22, 2017).
For more information, please contact:
Tai Kimura | +1 408 367 2204 | firstname.lastname@example.org
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.