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U.S. TAX REFORM UPDATE — SPOTLIGHT ON THE TREASURY AND THE TAX PROFESSION

Private Clients - 07 Nov 2018

It has been a busy summer for the Treasury Department as it has struggled to release guidance on changes adopted in the 2017 Tax Cuts and Jobs Act (“TCJA”) in time to enable taxpayers to comply. Given the significant vacuum created by the lack of clear guidance in the statute itself, tax practitioners, ourselves included, have entered the fray by submitting commentary to the Treasury Department on key issues now being addressed in regulations projects. 

Top priority had to be given by Treasury to the “transition tax” on accumulated offshore earnings of U.S.-controlled foreign corporations (CFC’s), as this was a liability for the 2017 tax year. The Treasury Department had previously issued three notices concerning regulations intended to be issued to address areas where urgent guidance was required, and the proposed regulations themselves were published August 9. These were followed by a barrage of complaints from professional and industry associations, professional firms and multinationals. The IRS has declined to comment on the degree to which it may change the proposed regulations to take these into account. 

Our attention has been focused on transitional guidance concerning changes to the foreign tax credit (FTC) rules which could have a significant impact on U.S. citizens residing overseas. Such individuals are potentially liable to worldwide double taxation as U.S. citizens and residents of other taxing jurisdictions, and their only protection is the FTC which typically must be granted by the U.S. rather than by the state of residence. One of the TCJA changes is to require that FTC’s on “foreign branch income” be calculated separately.  For overseas individuals, this applies to income from self-employment and trading (e.g. professional) partnerships, including income of foreign trading corporations that have elected to be “transparent” for U.S. purposes. Many of our clients had large FTC carryovers at the end of 2017 that they were relying on to mitigate tax on future foreign source income, but unlike prior similar legislative changes to the FTC rules the TCJA provision has no guidance about whether and to what extent such carryovers will be available to offset tax on post-2017 foreign branch income, even if one is able to “trace” the carryovers to tax on such income. On August 30 we submitted commentary explaining to the Treasury Department the issues facing U.S. citizens resident overseas and recommending a transitional rule that would be both fair and capable of being applied without significant added compliance costs. A subsequent article published in the Worldwide Tax Daily highlighted the issue and quoted extensively from our submission. The Treasury Department has promised guidance on this issue before year-end.

Another area of great concern for some of our clients is the new tax on “global intangible low-taxed income” (GILTI) attributed from a CFC to a 10% or greater individual U.S. shareholder. The CFC rules apply to both corporate and individual CFC shareholders, but the preponderance of the revenue generated under the rules comes from domestic corporate shareholders and therefore insufficient attention is given to the position of individuals.   An area of great uncertainty is whether individual U.S. shareholders electing to be taxed as if their CFC participations were held through a domestic corporation will be able to benefit from the same reduced rate of tax on GILTI (10.5% rather than 21%) that would be available to an actual domestic corporate shareholder. Without such relief, individual U.S. shareholders of existing CFC structures will face substantial “dry” (i.e. unfunded) tax charges on their GILTI.  On October 8 we submitted our commentary to the Treasury Department highlighting this problem and setting out our analysis of why the lower rate of tax was in fact required under the new legislation. Again, the Treasury Department has promised guidance by year-end. 

We hope to be able to continue bringing to the Treasury Department’s attention the particular concerns of U.S. citizens residing overseas, as well as nonresident aliens and foreign corporations, which are raised by the TCJA and its lack of clear guidance. 

 

August 30 - Letter to the IRS on broader transitional rules on excess foreign taxes

October 8Letter to the IRS on proposed GILTI regulations

 

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Jeffrey Gould

Jeffrey Gould

Director

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