What are the top challenges your clients face in preparing for implementation of the TCJA?
I think the top challenges clients face as they prepare to implement the new international provisions of TCJA are (1) understanding the interactions the rules have with each other and with portions of the Code that remained largely unchanged by TCJA (for example, Subpart F provisions); (2) planning without final guidance in many areas; and (3) dealing with a fair amount of uncertainty as to the “staying power” of certain features of tax reform and the implications of the new provisions in the context of the U.S.’s international obligations.
In trying to plan, clients are forced to turn to complex models to determine the impacts any modifications to their structure will have. In addition, while Treasury and the IRS have responded with tremendous speed and thoughtfulness in getting out guidance, we are still awaiting final regulations on the BEAT and the interest expense deduction limitation. And while the recently proposed regulations offering a high tax exception for GILTI are welcome relief for many clients, they will not be able to take advantage of the exception until those regulations are finalized.
With respect to uncertainty, some clients have expressed concern that, for example, the 21% rate will increase and the U.S. will not be able to successfully defend the FDII deduction in the face of a WTO challenge, hampering their ability to engage in long-range planning. Already, many taxpayers have mobilized and formed coalitions around lobbying Congress to maintain the low corporate rate, and to refute the allegation that the FDII deduction is an illegal export subsidy. Finally, some are concerned that the BEAT violates certain articles of U.S. tax treaties. As the Senate begins to take action on some long-outstanding protocols, how this issue is dealt with respect to treaties that have yet to be ratified remains to be seen.
What do you feel are the key areas in which regulations coming out of the TCJA will have an impact on the international operations of U.S. companies?
Certainly, the high-tax exception to GILTI will have an impact — it is a welcome development for many clients, as it provides relief from the requirement that for foreign tax credit purposes, expenses must be allocated and apportioned to the GILTI basket of income. I imagine many comments will relate to the effective date in the proposed regulations, which restricts use of the more expansive high tax exception (as opposed to that contained in the final GILTI regulations, which were also just recently issued) until the regulations are actually finalized.
Moreover, the fact that the original package of GILTI regulations — offering guidance on the mechanical application of the rules, including the anti-abuse provision — was finalized before the June 22, 2019 deadline offers clients the opportunity to apply that guidance as if it had been in effect when TCJA became effective.
Finally, many taxpayers are anxiously awaiting final BEAT regulations, although the prospect of a pronouncement as momentous as the high tax exception in the GILTI space is unlikely.
What broad strategy would you advise to clients for a transparent position ahead of questions they may face from different tax administrations?
Even with the enactment of new tax provisions, I don’t think taxpayers should change the way they interface with tax administrations. As always, support for tax return positions will be of paramount importance, as will transparency with respect to information provided to tax authorities.
The implementation of new laws may warrant changes to a client’s structure or supply chain that dovetail with larger business goals. Clients may be faced with a higher level of scrutiny when returns in a particular jurisdiction change, but armed with a clear business case, robust transfer pricing documentation, and tax memos to the file outlining support for the position taken regarding the tax treatment of various transactions, clients can deal head-on with any challenges in a transparent fashion.
On a prospective basis, clients may also want to consider obtaining certainty for related party transactions through advance pricing agreements. Certainly, the enactment of the BEAT presents many novel issues in the transfer pricing context, and the APMA program may be amenable to addressing some of the more nuanced aspects of the BEAT in the context of an APA. Such an approach would be relatively low-risk from the government’s perspective, in that the relief would remain confidential, and the IRS would only be bound as to that particular taxpayer.
If the U.S. tax treatment is of paramount importance, clients may also be able to ask for a private letter ruling as to the treatment of certain transactions, provided the IRS does not preclude the particular issue from being addressed in Rev. Proc. 2020-1.
Finally, clients are well-advised to remain abreast of ongoing enforcement initiatives, including priority audit issues and general controversy trends, that are underway not only at the IRS, but at tax administrations around the world.