BEPS: US Treasury Proposes Changes to US International Tax Regime

By Robert Robillard - 10 February 2016

This blogpost originally appeared on rbrt.ca.

The US Treasury Department has just released a series of proposals to modify the US international tax regime which includes:

  • Restrict Deductions for Excessive Interest of Members of Financial Reporting Groups;
  • Provide Tax Incentives for Locating Jobs and Business Activity in the United States and Remove Tax Deductions for Shipping Jobs Overseas;
  • Repeal Delay in the Implementation of Worldwide Interest Allocation;
  • Impose a 19-percent Minimum Tax on Foreign Income;
  • Impose a 14-Percent One-Time Tax on Previously Untaxed Foreign Income;
  • Limit Shifting of Income Through Intangible Property Transfers;
  • Disallow the Deduction for Excess Non-Taxed Reinsurance Premiums Paid to Affiliates;
  • Modify Tax Rules for Dual Capacity Taxpayers;
  • Tax Gain from the Sale of a Partnership Interest on Look-Through Basis;
  • Modify Sections 338(h)(16) and 902 To Limit Credits When Non-Double Taxation Exists;
  • Close Loopholes Under Subpart F;
  • Restrict the Use of Hybrid Arrangements that Create Stateless Income; and
  • Limit the Ability of Domestic Entities to Expatriate.

Many of these changes will create alignment with BEPS.

With respect to untaxed foreign income, the document explains (p. 13):

“In connection with the transition to the minimum tax [see pp. 9-11), this proposal would impose a one-time 14-percent tax on earnings accumulated in CFCs and not previously subject to U.S. tax. A credit would be allowed for the amount of foreign taxes associated with such earnings multiplied by the ratio of the one-time tax rate to the maximum U.S. corporate tax rate for 2016. The accumulated income subject to the one-time tax could then be repatriated without any further U.S. tax. The proposal would be effective as of the date of enactment and would apply to earnings accumulated for taxable years beginning no later than December 31, 2016. The tax would be payable ratably over five years.”

With respect to the potential shifting of income through intangible property transfer, the document indicates (p. 14):

“The proposal would provide that the definition of intangible property under section 936(h)(3)(B) (and therefore for purposes of sections 367 and 482) also includes workforce in place, goodwill, and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual. The proposal also would clarify that where multiple intangible properties are transferred, or where intangible property is transferred with other property or services, the Commissioner of the IRS may value the properties or services on an aggregate basis where that achieves a more reliable result. In addition, the proposal would clarify that the Commissioner of the IRS may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative to the controlled transaction undertaken.

The proposal would be effective for taxable years beginning after December 31, 2016.”

Significant changes are also proposed for the computation of subpart F income which would create two new “categories” of subpart F income (pp. 22-24):

  • Transactions involving digital goods or services; and
  • A widening of foreign base company sales income to include manufacturing services arrangements (“the proposal would expand the category of foreign base company sales income to include income of a CFC from the sale of property manufactured on behalf of the CFC by a related person. The existing exceptions to foreign base company sales income would continue to apply.”).

Other changes relate to the use of hybrid arrangements (pp. 25-26):

Restrict the use of hybrid arrangements that create stateless income 

The proposal would deny deductions for interest and royalty payments made to related parties under certain circumstances involving a hybrid arrangement, including if either (i) as a result of the hybrid arrangement, there is no corresponding inclusion to the recipient in the foreign jurisdiction or (ii) the hybrid arrangement would permit the taxpayer to claim an additional
deduction for the same payment in another jurisdiction.

The Secretary would be granted authority to issue any regulations necessary to carry out the purposes of this proposal, including regulations that would (1) deny deductions from certain conduit arrangements that involve a hybrid arrangement between at least two of the parties to the conduit arrangement; (2) deny interest or royalty deductions arising from certain hybrid arrangements involving unrelated parties in appropriate circumstances, such as structured transactions; and (3) deny all or a portion of a deduction claimed with respect to an interest or royalty payment that, as a result of the hybrid arrangement, is subject to inclusion in the recipient’s jurisdiction pursuant to a preferential regime that has the effect of reducing the generally applicable statutory rate by at least 25 percent.

Limit the application of exceptions under subpart F for certain transactions that use reverse hybrids to create stateless income 

Additionally, the proposal would provide that sections 954(c)(3) and 954(c)(6) would not apply to payments made to a foreign reverse hybrid owned directly by one or more U.S. persons when such amounts are received from foreign related persons that claim a deduction for foreign tax purposes with respect to the payment.

The proposal would be effective for taxable years beginning after December 31, 2016.”

The complete US Treasury’s Greenbook is available here. Chapter 1 highlights the proposed changes to the US international tax regime.

The library on BEPS and Transfer Pricing is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at” rbrt.ca
www.rbrt.ca

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