Washington Tax Insight October 2018
Politics and Congressional Activity
The House voted 361-61 to approve a FY 2019 spending bill that would keep the government running past September 30th until December 7th by approving funding for the departments of Defense, Labor, Education and HHS and including short term funding for the rest of the government. The Senate had passed the stopgap funding bill by a vote of 93-7 prior to the House vote. Despite his threat that he would not sign a bill that did not include funding for a border wall, the President has signed the bill and will delay the border wall funding fight until after the mid-term elections.
The House is scheduled to adjourn now until after the mid-term elections, but the Senate is scheduled to remain in session, which will prevent Senators running for re-election from spending time in their states campaigning. Although there is other legislation that awaits action prior to the end of the year, it appears now that those issues will likely have to wait for a lame-duck session for possible completion.
Senate: The Senate approved the nomination of Charles Rettig as IRS Commissioner in a 64-33 vote. He will have a full agenda when he takes office on October 1st that includes ensuring that the IRS is ready for the upcoming filing season, continuing the release of guidance for the Tax Cuts and Jobs Act, and addressing the information technology and security improvements that are needed.
The White House: The President signed an Executive Order directing a review of the rules governing multiple employer plans (MEPs) with the goal of expanding their availability. The order also directs a review of the minimum distribution rules for 401(k) plans and individual retirement accounts (IRAs) to potentially lower the distribution amounts based on current life expectancy and mortality tables.
Lawmakers in both the House and Senate are also considering access to and participation in retirement savings plans. Tax Reform 2.0 includes provisions related to retirement savings, and earlier this year, SFC Chair Hatch (R-UT) and Ranking Member Wyden (D-OR) introduced bipartisan retirement reform legislation, but there has been no action on this legislation in the committee.
Courts – The Wayfair Decision – Online Sales Taxation
A small group of bipartisan House members introduced HR 6824, the Online Sales Simplicity and Small Business Relief Act, in order to address issues around the collection of sales and use tax on “remote” sales transactions resulting from the Wayfair decision, which struck down the physical presence requirement. The bill would prohibit states from retroactively taxing any remote sales that took place before June 21, 2018, the date the Wayfair decision was announced, which was an idea endorsed by the Supreme Court that most states appear to be following. It would also prohibit states from imposing new collection requirements on remote seller transactions before January 1, 2019.
Finally, it would create a small business exemption that would apply to a remote seller with less than $10 million in US gross annual receipts. Under this exemption, no state would be allowed to require such a small business to collect and remit sales taxes until 30 days after the states had formed an interstate compact on remote sales taxation with approval by Congress. The bill expresses the sense of Congress that states should develop an interstate compact that “identifies a clearly defined minimum substantial nexus between the remote seller and the taxing state” and that “simplifies registration, collection, remittance, auditing, and other compliance processes” in a way that “eliminates the need for the continuation of the small business remote seller exemption.”
The bill has been referred to the House Judiciary Committee, but no mark-up has been scheduled. It is uncertain whether the bill will advance prior to the end of this Congressional session, but the sponsors are hoping for House Floor consideration after the mid-term elections. Many states have legislation that is due to become effective this fall, which could impact the urgency of addressing this bill.
The National Council of State Legislatures has announced that it opposes the legislation calling it an “unwarranted intrusion on state authority, which, if enacted, would continue the competitive advantage online sellers enjoy over Main Street sellers.”
Treasury and the IRS
Global Intangible Low-Taxed Income (GILTI): The IRS issued proposed regulations on the tax regime for Global Intangible Low-Taxed Income (GILTI) under Code section 951A, and the 157-page rulemaking document also included proposed regulations under Code sections 951, 1502, and 6038. The new rules requireUS taxpayers (including individuals, domestic corporations, partnerships, trusts, and estates) owning at least 10 percent of the value or voting rights of one or more controlled foreign corporations (CFCs) to include its GILTI as taxable income even if not distributed to a shareholder. Reporting is done through Form 8992, US Shareholder Calculation of Global Intangible Low-Taxed Income, and various other forms, which are also covered by this guidance.
This release, which focuses on how to calculate the tax, is the first of three sets of rules expected for the GILTI regime. The first set answers one important question: companies filing a consolidated return will be treated as a single US shareholder and will not have to pay separately for each entity.
This guidance generally applies to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of US shareholders in which or within which such taxable years end, although some provisions of the regulations have different effective dates. The proposed regulations include an anti-abuse rule targeting companies with non-calendar fiscal years that some tax experts are calling overly broad and aggressive. Under the proposed regulations, if a CFC has a taxable year that doesn’t align with the calendar year, it could transfer property to an affiliated CFC before the GILTI rule applies to ultimately reduce the US shareholder’s inclusion amount. The rules would disregard such transactions for calculation purposes, and they do not require the IRS to show any tax avoidance purpose or to apply any economic substance principles. Under the new law, Congress did give Treasury regulatory authority to address transactions involving depreciable tangible assets, but this broad rule also covers intangible property.
The proposed regulations do not include foreign tax credit computational rules relating to GILTI or rules relating to business expenses, which will be addressed separately in future guidance. Foreign tax credits apply to income under GILTI at an 80 percent rate. Code section 904 limits foreign tax credits to the amount of US tax liability on foreign income, and Code section 904(d) established that this calculation would be performed separately for a taxpayer’s GILTI inclusion, which could result in additional US tax.
The IRS issued Revenue Procedure 2018-48 which provides guidance for real estate investment trusts regarding the treatment of certain foreign income inclusions, including inclusions under Code section 951A for purposes of the 95 percent gross income qualification test of Code section 856(c)(2).
Section 965 Transition Tax: The IRS issued Revenue Procedure 2018-47, which provides guidance under Code section 4982 for regulated investment companies (RICs) on the treatment of amounts that Code section 965 requires to be included in gross income under Code section 951(a)(1) for the excise tax year ended on December 31, 2017. This guidance outlines the cases in which the IRS will not challenge a RIC’s treatment of a 2017 inclusion.
State and Local Tax Deduction: The IRS issued a news release clarifying that business taxpayers that make business-related payments to charities or governments for which they receive state or local tax credits can generally deduct the payments as business expenses. The IRS also stated that the deductibility of such payments is unaffected by the recent notice of proposed rulemaking concerning the availability of a charitable contribution deduction for contributions pursuant to such programs. This notice was a follow up to the August 23rd notice of proposed regulations on state and local tax workarounds, which several states are working on in response to the cap on state and local tax deductions included in the TCJA.
Treasury announced that the IRS will implement a redesigned Form W-4, Employee’s Withholding Allowance Certificate, for tax year 2020 with the expectation that this timeline will allow for continued revision of the form. Revisions to the wage withholding system and Form W-4 were necessitated by the enactment of the TCJA. Draft changes released in June were deemed to be too complicated after concerns were raised by taxpayers. For tax year 2019, the IRS will release an update for the Form W-4 currently being used for 2018.
Other Issues and Guidance
The IRS issued proposed regulations to remove the debt-equity documentation requirements under Code section 385, which were intended to discourage corporate inversions and prevent an accounting procedure called “earnings stripping” that was carried out by loans from subsidiaries in low-tax jurisdictions to subsidiaries in higher tax jurisdictions. The 2016 final regulations had established documentation requirements that could have resulted in the recharacterization of debt as equity, thereby preventing interest payments on the loans from being tax-deductible in the US. The IRS acknowledges that removal of the document requirements will make it harder for them to evaluate the legitimacy of loans, but commented that the TCJA lessened the need for them due to the significant decrease in the corporate tax rate, the reduced benefit of the interest expense deduction, and the new anti-abuse rules. The IRS commented, however, that it would continue to study the documentation issue and may propose further changes. “Any such regulations would be substantially simplified and streamlined to reduce the burden on US corporations and yet would still require sufficient documentation and other information for tax administration purposes,” the IRS states. “Further, they would be proposed with a prospective effective date to allow sufficient lead time for taxpayers to design and implement systems to comply with those regulations.” Businesses typically already have documentation and adequate procedures in place to minimize tax risk in intercompany financial dealings, but it is advisable to continue to document debt transactions in the event they are challenged by the IRS during an audit.
The IRS announced that it is reorganizing its Advance Pricing and Mutual Agreement (APMA) program, which resolves transfer pricing disputes. The APMA program is now divided into three units, each led by an assistant director with each unit divided into two teams led by a manager. “Country inventories are aligned generally at the group level,” the IRS stated. “Managerial responsibility for a given APA or MAP case or a given country inventory will typically rest with one of the team managers from the group to which that country is assigned. If additional managerial support is needed, another manager (or managers), either from the same group or another group, will also be assigned to a case or to a country inventory.” Unless advised otherwise, taxpayers should assume that their cases will be handled by their current APMA team. Existing cases will be transferred only as necessary or only to the extent that doing so will not significantly disrupt the MAP or APA process.
The IRS Large Business and International (LB&I) division announced five new compliance campaigns that its audit teams will focus on including: (1) Code section 199, Claims Risk Review; (2) syndicated conservation easement transactions; (3) foreign base company sales income/manufacturing branch rules; (4) Form 1120-F interest expense/home office expense related to Code section 882 effectively connected income; and (5) individuals employed by foreign governments & international organizations. LB&I is also reviewing the TCJA to determine which existing campaigns, if any, could be affected by changes in the law.
The IRS announced changes to its Compliance Assurance (CAP) Program for 2019 which include:
- The 2019 application period opens on October 1, 2018
- Taxpayers will be required to provide in their applications a preliminary list of material issues for the year including specified transfer pricing issue information and research credit information
- Taxpayers and the IRS Large Business and International (LB&I) division will be subject to additional requirements on effective communication and prompt resolution of issues
For future years, the IRS expects additional changes, including that CAP will be open to additional taxpayers who meet eligibility criteria and program requirements, taxpayers will be required to provide certification of a tax control framework, and issue-based resolutions may become part of the program.
The IRS issued Revenue Procedure 2018-49, which allows taxpayers to change their accounting method in compliance with a modified accounting method issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board, effective as of May 10, 2018. In modifying Revenue Procedure 2018-29 and Revenue Procedure 2018-31, this guidance permits a taxpayer that made an early decision to adopt a method of recognizing revenues described in the financial accounting standards in FASB’s “Revenue from Contracts with Customers (Topic 606)” to change its method of accounting for the recognition of income for federal income tax purposes.
The IRS issued Notice 2018-72, which tells taxpayers that they will amend regulations under Code section 871(m) to delay the effective/applicability date of certain rules. The guidance extends the phase-in period provided in Notice 2016-76 for specified provisions of the Code section 871(m) regulations and allows withholding agents to apply the transition rules from Notice 2010-46.
The IRS issued Notice 2018-75 to provide clarifying guidance regarding employer-reimbursed expenses for qualified moving expenses incurred prior to 2018.
Treasury and the IRS issued Revenue Procedure 2018-36, which provides a current list of the jurisdictions for which the deposit interest reporting requirements under Treasury Reg. sections 1.6049-4 and 1.6049-8 apply. The guidance also provides a current list of the jurisdictions with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship.
The OECD issued additional guidance for tax administrators and multinational enterprises (MNEs) on the implementation of country-by-country (CbC) reporting. The new guidance includes questions and answers on the treatment of dividends received and the number of employees to be reported in cases where an MNE uses proportional consolidation in preparing its consolidated financial statements, which apply prospectively. It also clarifies that shortened amounts should not be used in completing Table 1 of a country-by-country report and contains a table that summarizes existing interpretative guidance on the approach to be applied in cases of mergers, demergers, and acquisitions.
The OECD released the fourth round of BEPS Action 14 peer review reports on improving tax dispute resolution mechanisms. Each report assesses a country’s efforts to implement the Action 14 minimum standard as agreed to under the OECD/G20 BEPS Project. The reports of Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand, and Portugal contain over 130 targeted recommendations that will be followed up in stage 2 of the peer review process. Also available is a document addressing the implementation of best practices for each jurisdiction that opted to have their best practices assessed.
The OECD released a report titled Tax Reform Policy Reforms covering the latest tax policy reforms in all OECD countries plus Argentina, Indonesia, and South Africa. The report included the conclusion that countries are using recent tax reforms to lower taxes on businesses and individuals with a view towards boosting investment, consumption, and labor market participation.
The White House has nominated Pamela M. Bates to be the ambassador to the OECD, and her nomination has been forwarded to the Senate Foreign Relations Committee for review prior to a Senate confirmation vote. A recent letter from several Republican tax-writers raised concern about the fact that the White House had not named an ambassador to the OECD to represent US interests at the 36-nation organization that coordinates global economic policy including tax issues, although some Washington tax professionals have commented that work on tax issues continued through the participation of government tax officials on tax issues who represent the US in the OECD’s Committee on Fiscal Affairs working groups. The US Ambassador to the OECD serves as the permanent representative of the US on the OECD Council, which is the organization’s highest policy-making body, but is not the head of the American delegation to the OECD with that role filled by a career foreign service officer. On technical committees covering areas like tax policy, the US government is represented by specialists from the federal bureaucracy including Chip Harter, who is the current Deputy Assistant Secretary (International Tax Affairs) at Treasury.
The European Union released a draft legislative resolution on the proposal for a European Council directive containing rules relating to the corporate taxation of a significant digital presence.
Tax Reform Update
Tax Reform 2.0
The House has passed their Tax Reform 2.0 initiative prior to adjourning until after the mid-term elections. Three individual bills were approved in the full House, but they are unlikely to be considered by the Senate until after the November elections, if at all in 2018. The three bills that comprise the package include the “Protecting Family and Small Business Tax Cuts Act of 2018,” the “Family Savings Act of 2018,” and the “American Innovation Act of 2018.” The Committee on Joint Taxation has estimated that this package would reduce federal revenue by $657 billion over ten years.
This tax legislation will not have the protections of the budget reconciliation rules in the Senate, which means that 60 votes would be needed for passage requiring some Democratic support. House action on this second set of tax reform proposals has generally been viewed as a political exercise, although there is some speculation that the retirement and family savings legislation could gain enough bipartisan support to be considered in a lame-duck session.
The Protecting Family and Small Business Tax Cuts Act would make permanent the individual tax cuts and the deduction for pass-through business income from the TCJA and would create a revenue loss of $631 billion over ten years. The TCJA provisions were written to expire in the future in order to ensure that the legislation met the requirements of the budget reconciliation rules.
The American Innovation Act aims to encourage the creation of new companies by simplifying and expanding the deduction for start-up and organization costs and preserving start-up net operating losses and tax credits after an ownership change; it is estimated to have a revenue loss of $5.4 billion over ten years.
The Family Savings Act would make a series of changes to employer-sponsored and individual retirement savings plans including the creation of tax-advantaged Universal Savings Accounts (capped at $2500 annually) for individuals, the expansion of Code section 529 plans, and the allowance of penalty-free withdrawals from certain qualified savings plans to cover certain expenses for newborn or adopted children. The bill would lose about $21 billion of revenue over ten years.
The Committee also approved the “Save American Workers Act,” which would make several changes to the Affordable Care Act (ACA), including a delay in the employer mandate and the Cadillac tax (excise tax on high cost employer-sponsored health coverage) as well as a change that would increase from 30 hours to 40 hours the threshold for classification as a full-time employee under the ACA. This bill is estimated to reduce federal revenue by $58.5 billion over ten years. A vote in the full House on this bill was scheduled for earlier in September, but it was delayed and has not yet occurred.