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Britt Haxton focuses her practice on US and international tax matters for US and non-US multinationals. Britt regularly advises clients on tax-free and taxable acquisitions, dispositions, restructurings and liquidations. In addition, she has experience in providing advice on the Foreign Account Tax Compliance Act (FATCA) compliance and reporting. Britt also advises clients on international tax issues, including foreign tax credit, subpart F and application of bilateral income tax treaties. Read Britt Haxton's full bio.

On December 13, 2018, US Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations for the Base Erosion and Anti-Abuse Tax (the BEAT), which was added to the Code as part of the 2017 Tax Act. The proposed regulations provide helpful guidance on a range of important topics and generally go a long way toward a reasonable implementation of a very challenging statute. There is one aspect of the proposed regulations, however, that may be an unwelcome surprise for many taxpayers; the proposed regulations treat stock consideration in non-cash transactions as BEAT “payments,” thereby creating the potential for BEAT liability in situations involving certain liquidations, tax-free reorganizations and other non-cash transactions.

Located in section 59A, the BEAT imposes a minimum tax on US corporations (and certain foreign corporations, which are not the focus of this Insight) that consistently have annual gross receipts of $500 million or more and claim more than a de minimis amount of “base erosion tax benefits” for a taxable year. In general, as base erosion tax benefits increase, a corporate taxpayer’s BEAT liability increases.

The proposed regulations, which are generally proposed to be effective for tax years beginning after December 31, 2017, include guidance for determining the base erosion payments that will give rise to annual base erosion tax benefits. Prop. Reg. § 1.59A-3(b) applies the same four categories of base erosion payments found in section 59A(d) for amounts paid or accrued to a related foreign party. The two categories that should affect the most taxpayers are the general category for currently deductible items and the special category for the acquisition of depreciable or amortizable property. With respect to this latter category, the acquisition price of the property will constitute the base erosion payment, but only the amount of any depreciation or amortization deductions claimed in a tax year will produce a base erosion tax benefit for purposes of computing the BEAT.

Continue Reading Proposed BEAT Regulations | Tax-Free Transactions May Give Rise to a Liability

The Tax Act created two new foreign tax credit limitation baskets – one for foreign branch income (new section 904(d)(1)(B)) and one for any amount includible in gross income under section 951A (i.e., GILTI) – however, it failed to amend section 904(d)(2)(H)(i) to reflect these changes to section 904(d)(1). As a result of this oversight, section 904(d)(2)(H)(i) currently instructs the taxpayer to treat foreign taxes imposed on amounts that do not constitute income under US principles as imposed on income described in the foreign branch income basket. In light of legislative history and Treasury regulations, such a failure to amend the Code appears to be a drafting error. This article addresses the relevant case law that, on balance, supports applying section 904(d)(2)(H)(i) as if its language and cross-reference had been properly amended.

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On November 16, 2017, we participated in a panel discussion at Tax Executives Institute’s (TEI’s) Chicago International Tax Forum regarding base erosion measures under the (then proposed) House and Senate tax reform bills. The House proposed a new 20 percent excise tax on most related-party payments (other than interest) that are deductible or includible in cost of goods sold or depreciable/amortizable basis. The Senate proposed a base erosion minimum tax on certain outbound base erosion payments paid by a corporation to foreign related parties. The conference committee has since submitted a conference report to accompany the Tax Cuts and Jobs Act that adopts the Senate’s proposed base erosion measure, with some changes. The base erosion minimum tax is equal to the excess of 10 percent of the modified taxable income of the corporation over an amount equal to the taxpayer’s regular tax liability reduced by certain Chapter 1 credits. The base erosion minimum tax could impact any multinational group in which foreign affiliates provide services, intellectual property, depreciable or amortizable property and other deductible items to related US corporations. It remains to be seen how the base erosion minimum tax will affect businesses in practice, and how countries with which the United States has a tax treaty will respond.

Internal Revenue Code (Code) Section 385 provides that the US Department of the Treasury (Treasury) is authorized to issue regulations to determine whether an interest in a corporation is to be treated for purposes of the Code as stock or indebtedness. After decades of inaction, proposed regulations were issued on April 14, 2016. The proposed regulations were not well-received; the tax bar had serious and substantial comments to the proposed regulations. Among the most important critiques, there were criticisms for the potential overbreadth of the regulations’ application to foreign-to-foreign transactions, the lack of a de minimis exception for smaller companies and for the anticipated burden of the contemporaneous documentation requirements.

Treasury released final regulations under Code Section 385, which are effective as of October 21, 2016. Although the proposed regulations were changed in some respects, the final regulations retained strict documentation requirements.

In Executive Order 13789, the President called on Treasury to identify and reduce tax regulatory burdens that impose undue financial burdens on US taxpayers, or otherwise add undue complexity to federal tax law. In response, Treasury indicated on October 2, 2017, that it would potentially revoke the documentation requirements under the proposed regulations. Continue Reading The Slow Death of the Section 385 Regulations

Section 385(a) provides that Treasury is authorized to issue regulations to determine whether an interest in a corporation is to be treated for purposes of the Code as stock or indebtedness. On April 4, 2016, Treasury and the Service issued proposed regulations (Proposed Regulations, found here) under section 385 that treat certain purported debt between related entities as stock for US federal income tax purposes. Treasury stated specifically that the regulations under section 385 had been issued to “address the issue of earnings stripping” in three ways – (1) “[t]argeting transactions that increase related-party debt that does not finance new investment in the United States”; (2) “[a]llowing the IRS on audit to divide a purported debt instrument into part debt and part stock”; and (3) “[r]equiring documentation for members of large groups to include key information for debt-equity tax analysis[.]”

Once the Proposed Regulations were issued, practitioners and industry groups of affected companies (among others) questioned whether the Proposed Regulations were narrowly tailored to serve these stated purposes, and observed that the Proposed Regulations represented a significant departure from past practice. The Proposed Regulations received widespread attention, and practitioner groups and others submitted numerous detailed formal comments before the regulations were finalized. Among the most important critiques, practitioners criticized the Proposed Regulations for their potential overbreadth in their application to foreign-to-foreign transactions, for their lack of a de minimis exception for smaller companies, and for the anticipated burden of the contemporaneous documentation requirements.

Treasury and the Service released final and temporary section 385 regulations (Final 385 Regulations, available here), which are effective as of October 21, 2016, the date of publication in the Federal Register. The Final 385 Regulations provide several exceptions not contained in the Proposed Regulations, including that the Final 385 Regulations apply only to debt instruments issued by a covered member, which is defined as a domestic corporation, to members of its expanded group. The Final 385 Regulations were accompanied by an unusually lengthy Preamble which purports to address major comments received during the notice-and-comment process.

Like the Proposed Regulations, the Final 385 Regulations contain the documentation rules that require specific substantiation in order to treat related-party instruments as debt. These rules are not effective for debt instruments issued prior to January 1, 2018. The Final 385 Regulations contain several modifications to the documentation rules. For example, the Proposed Regulations automatically recharacterized a purported debt instrument as equity in the event of a documentation failure. Under the Final 385 Regulations, if an expanded group is otherwise highly compliant with the documentation rules, then the Final 385 Regulations apply a rebuttable presumption with respect to a purported debt instrument under which a taxpayer can rebut an equity presumption by satisfying specific enumerated tests.

The Final 385 Regulations contain the recast rules issued in Prop. Treas. Reg. §1.385-3, but with significant modifications. In general terms, the Final 385 Regulations reduce the debt issuance to the extent the issuer has sufficient E&P accumulated after April 4, 2016, and/or qualified contributions. Although exceptions to the recast rules were expanded, the complex requirements and operating rules should be carefully studied to avoid traps for the unwary.

More detailed analysis of the Final 385 Regulations can be found here. It remains to be seen how the Final 385 Regulations will impact affected companies in practice, and what challenges may be raised to them.

On November 2, 2016, we participated in a panel discussion at TEI’s Houston Global Tax Symposium regarding the effects of the newly-finalized section 385 regulations. Of interest from a controversy perspective, we discussed the potential compliance burdens and privilege concerns raised by the new documentation requirements in the rules, and the potential problems with the non-rebuttable per se presumption in the transaction rules. We also discussed how the Internal Revenue Service has endeavored, in the regulations’ lengthy preamble, to address potential procedural challenges by responding to public comments and by providing justifications for the regulations, particularly in light of recent challenges to other regulations under the Administrative Procedure Act. It remains to be seen how the new 385 rules will affect businesses in practice, and how the IRS intends to apply them, consistent with its statutory mandate.