Under Subpart F, certain types of income and investments of earnings of a foreign corporation controlled by US shareholders (controlled foreign corporation, or CFC) are deemed distributed to the US shareholders and subject to current taxation. The recent tax reform legislation (Public Law No. 115-97) increased the amount of CFC income currently taxable to US shareholders, and expanded the CFC ownership rules, which means more foreign corporations are treated as CFCs.

 

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Tax reform is here to stay (at least for the foreseeable future). The Internal Revenue Service (IRS) may receive additional funds to implement the new tax law. With lowered tax rates, accelerated expensing and forced repatriation of foreign earnings comes an increased risk of an IRS audit. This brave new tax world has left so many questions that tax advisors’ phones have been ringing off the hooks! But as the end of the 2017 year and first quarter of 2018 dust settles, be mindful of the IRS audit to come. Continue Reading Expect Controversy in the Wake of Tax Reform

US tax reform finally occurred in 2017 with what was formerly referred to as the Tax Cuts and Jobs Act of 2017 (the Act). The headline from a corporate standpoint is reduction in the maximum rate from 35 percent to 21 percent beginning in 2018. In the international context, the Act: (i) embraces a territorial system as exists with most of its trading partners; (ii) seeks to protect the US tax base from perceived cross-border erosion; and (iii) enacts an incentive for certain economic investments in the United States at a globally attractive effective tax rate (13.125 percent).

The purpose of this post is not to review the technical provisions of the Act, but to note that as each multinational enterprise (MNE) evaluates its impact on its effective tax rate strategy (both opportunities and hazards), an item to keep on the agenda may be “could a bilateral APA be of assistance?” Continue Reading US Tax Reform: Potential Role of the APA Program

The recently enacted 2017 tax reform act imposes a new “base erosion and anti-abuse tax” (BEAT) on large corporations. The BEAT operates as a limited-scope alternative minimum tax, applied by adding back to taxable income certain deductible payments made to related foreign persons. Although positioned as an anti-abuse rule, the BEAT presents challenges for a wide range of common business structures employed by both non-US-based and US-based multinationals.

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Private equity sponsors and their lenders are particularly impacted by two key changes to business tax provisions in the Tax Cuts and Jobs Act: the new limitation on deductibility of business interest expense and the temporary increase in the amount of capital expenditures that may be currently expensed.

In our latest Tax Takes video, Gary Rosenbaum and Alexander Lee discuss changes to the interest deductibility cap and other considerations for sponsors and lenders under the new tax legislation.

On the Subject: The Impact of Tax Reform on Finance

Alexander LeeGary Rosenbaum and Sarah Steigleder examine the key changes to business tax provisions and their implications for credit terms and deal structures.

Multinational Enterprises (MNEs) are facing an evolving international tax landscape with long-term implications for tax compliance, planning and controversy. Understanding these changes requires continual effort. Tax Executives Institute recently invited us to explore Country-by-Country (CbC) reporting issues at the 2017 Global Tax Symposium in Houston, Texas. We had a lively discussion and know this will be a hot topic as jurisdictions begin reviewing the CbC reports.

As background, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project has been a key driver of international tax reform.  BEPS “Action 13” outlined a CbC reporting standard that has been adopted in more than 55 jurisdictions. The CbC report is an annual filing obligation identifying, among other things, the amount of revenue, profit before income tax, and income tax paid and accrued for each tax jurisdiction in which the taxpayer does business. The resulting transparency directly affects global tax strategies since the CbC report is subject to automatic exchange provisions and more than 1,000 such relationships have been established worldwide. Tax authorities will be using this information to perform tax risk assessments so taxpayers need heightened sensitivity to the breadth and depth of information available through the CbC report. If you are involved in the process of preparing a CbC report, discussing the CbC report with a tax authority, or are otherwise interested in how the CbC report could be used by a tax authority, the OECD’s Handbook on Effective Tax Risk Assessment is a valuable resource.

Continue Reading Tax Planning in a World of Increased Transparency

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.

The tax bar is abuzz with the talk of tax reform. Clients are in modeling purgatory, trying to calculate its effects and plan for the future. Public accounting firms are suggesting how to accelerate deductions in 2017 to take advantage of the massive tax rate decline in 2018. Now more than ever, there are substantial economic incentives to accelerate deductions in 2017 and defer income until 2018. Yes, it’s beginning to look a lot like Christmas and the end to what bodes to be a historic year for federal tax!

Not to be a Grinch, but consider the following as you prepare for year end. If you attempt to accelerate any deductions, make sure to have a complete, “audit-ready” file if the Internal Revenue Service (IRS) decides to test your position. Consider how you will protect against the assertion of any penalties; typically, your ticket to get of out penalty “prison” is to maintain proper substantiation and to establish a reasonable cause defense. An opinion of counsel is one method to meet your burden of establishing that defense. It is always better to be proactive and anticipate an IRS audit than to be reactive and try to compile the proper documentation after-the-fact.