From the Deferral Frying Pan into the Worldwide Fire – Rethinking CFC Taxation · 2020-02-27 · 2018 U.S. Cross-Border Tax Conference May 15 – 17, 2018 kpmg.com From the Deferral

2018 U.S. Cross-Border Tax Conference

May 15 – 17, 2018

kpmg.com

From the Deferral Frying Pan into the Worldwide Fire –Rethinking CFC Taxation

2© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices

AgendaThe Big Picture

Foreign Subsidiary Taxation

Impact of GILTI on International Tax Planning

Other Thoughts

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02

03

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Today’s presenters

Ron DabrowskiPrincipal and Technical Deputy to the Principal in Charge, Washington National Tax, KPMG LLPT: 202-533-4274E: [email protected]

Laurie MarshPrincipal, International Tax,KPMG LLPT: 212-872-6494E: [email protected]

Wit LeBlancVice President, Tax and TreasurerOceaneering International, Inc.

The big picture


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BEAT Section 59A— Imposes additional tax— Based on limiting deductibility of

deductible payments to foreign persons

Overview of new international tax framework

U.S.

FDII – 13.125%— Income from sale, leases, licenses, and dispositions

of property to foreign person for foreign use— Income from services to person outside the US

Distributions –— PTI— Participation Exemption (section 245A)— Subject to tax if hybrids or inverted

companies

GILTI – 10.5%— CFC income that is not exempt

or sub F— Current inclusion with 50%

deduction— 80% FTC (haircut)— Separate basket — No FTC carryforward— 163(j) limits

Sub F – 21%— Foreign base company income and 956— Current inclusion at 21%— General and passive baskets— 10 year FTC carryforward— 163(j) limits

Exempt Income – 0%— FOGEI— 10% QBAI— High Tax sub F

income (elective)

Branch Income – 21%— Current inclusion— Separate basket— 10 year carryforward— Cannot get FDII

Other Income – 21%— U.S. and foreign source income — That is not FDII or GILTI or

eligible for DRDs

163(j) Limit on interest deduction— Related and unrelated party debt— 30% of EBITDA (EBIT in 2022)

CFCF Branch


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Achieve deferral of US tax— Avoid Subpart F— Avoid CFC status

Avoid double taxation through use of FTCs— Create high-taxed E&P and repatriate foreign taxes (for current use or carryforward)

Rate Arbitrage— Move assets such as IP to lower-taxed jurisdictions— Create deductions in the US, earn deferred income in non-US jurisdictions with lower tax rates

General approach to international tax planning before tax reform (outbound)


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Avoid GILTI— Plan into High-Tax Subpart F— Reduce GILTI by avoiding “tested loss” traps— Reduce GILTI through related party payments to the US

Maximize use of FTCs— Keep FTCs out of the GILTI basket— Maximize capacity through allocation of expenses to US source or exempt income

Rate Arbitrage— Move assets (like IP) to the US— Create deductions in foreign jurisdictions and FDII, GILTI, or exempt income in the US

General approach to tax planning after tax reform (outbound)

Foreign subsidiary taxation


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The options for CFC income

Gross Income

Net Income

Allocable Deductions

ECISubpart F

Related-Party DividendsHigh-Tax Subpart FFOGEI

The GILTI Residual

21% US TaxMaybe FTCs

Distribute100% DRD (usually)95621% with FTCs

50% DRD (capped by taxable income)Crazy FTC rules


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The GILTI essentialsCurrent Inclusion US Shareholders are subject to current US taxation on their portion of

a CFC’s global intangible low-taxed income (GILTI)

Netting US Shareholders net “positive” GILTI and “negative” GILTI from their CFCs

Effective Date

Tax Rate Lower tax rate is achieved through a deduction: 50% for tax years beginning before 12/31/25, and 37.5% thereafter

Total GILTI and foreign-derived intangible income (FDII) deduction is limited by taxable income (without regard to GILTI and FDII)

Effective for CFC tax years beginning after December 31, 2017


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GILTI mechanics – definitionally drivenEach person who is a US shareholder of any CFC for any taxable year shall include in gross income such shareholder’s global intangible low-taxed income for such year

Excess of “net CFC tested income” over “net deemed tangible income return”

Excess of: aggregate of pro rata share of tested income of each CFC, over aggregate of pro rata share of tested loss of each CFC

Excess of: 10% of pro rata share of “qualified business asset investment” (“QBAI”) of each CFC, over interest expense taken into account in determining net CFC tested income

QBAI: adjusted basis of depreciable tangible property used in trade or business (and used in the production of tested income)

Excess of: gross income (other than ECI, Subpart F, High-taxed SubF, related party dividends, and FOGEI), less allocable deductions

Excess of: allocable deductions over gross income (other than ECI, Subpart F, High-taxed SubF, related party dividends, and FOGEI)


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GILTI mechanics – observations

BUT:

Computation done on a USSH-by-USSH basis, not CFC-by-CFC

Impact of expense allocations!

QBAI determined on a quarterly average method, using basis determined under ADS principles

No QBAI from tested loss CFCs

Interest expense = interest expense paid by CFCs outside of USSH’s chain

Seems safe to assume that 1) a consolidated group will be treated as one shareholder and 2) the GILTI/Section 78 issue will be solved by treating the gross up as GILTI

Impact of GILTI on international tax planning


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USP

CFC 1

CFC 2

CFC Structure Branch Structure

USP

CFC 1

DE

USP

DE

DE

Pros: • Potential to generate high-taxed GL income, taxed through SubF and 956

• Potential GILTI benefits; SubFstructuring

• Limited ability to generate high-taxed GL income

• No SubF and GILTI; limit BEAT

• Separate FTC basket; future restructuring could impose US tax

CFC/Branch Structure

• GILTI ComplexityCons:

The range of options


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“Under a 21-percent corporate tax rate, and as a result of the deduction for FDII and GILTI, the effective tax rate on FDII is 13.125 percent and the effective U.S. tax rate on GILTI (with respect to domestic corporations) is 10.5 percent for taxable years beginning after December 31, 2017, and before January 1, 2026.1525 Since only a portion (80 percent) of foreign tax credits are allowed to offset U.S. tax on GILTI, the minimum foreign tax rate, with respect to GILTI, at which no U.S. residual tax is owed by a domestic corporation is 13.125 percent.1526”

1526 13.125 percent equals the effective GILTI rate of 10.5 percent divided by 80 percent. If the foreign tax rate on GILTI is 13.125 percent, and domestic corporations are allowed a credit equal to 80 percent of foreign taxes paid, then the post-credit foreign tax rate on GILTI equals 10.5 percent (= 13.125 percent × 80 percent), which equals the effective GILTI rate of 10.5 percent.

Therefore, no U.S. residual tax is owed.

A perfect (GILTI) world – the conference report

P.L. 115-97, Conference Report, December 15, 2017 (emphasis added)


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A perfect (GILTI) world (conference report)

USP

CFC

CFCGross Income $100

Deductions $(0)

Tangible Assets $0

Foreign Taxes $13.13

Tax rate: 13.125%

GILTI Amount Calculation $86.87Net Deemed Tangible Income Return10% of QBAI $0.00 GILTI Amount $86.87

GILTI Deemed Paid Taxes CalculationInclusion PercentageGILTI Amount $86.87 Tested Income $86.87

Inclusion Percentage 100.0%GILTI Haircut 80.00%Tested Foreign Income Taxes $13.13GILTI Deemed Paid Taxes $10.50

Section 78 Gross-Up $13.13Deduction Calculations

GILTI $43.43Section 78 $6.57

Total Deduction $50.00

Residual US Tax CalculationGILTI $43.43Section 78 Income $6.57

Total Income $50.00US Corporate Rate 21%Tentative US Tax $10.50Less: GILTI Deemed Paid Taxes: $10.50Residual US Tax/(Excess FTCs) $0


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GILTI Amount Calculation $86.8710% of QBAI $0.00

GILTI Amount $86.87

GILTI Deemed Paid Taxes CalculationInclusion Percentage 100%GILTI Amount $86.87 Tested Income $86.87


Section 78 Gross-Up $13.13

Residual US Tax CalculationGILTI

GILTI Income $50.00Tentative US Tax @21% $10.50GILTI Deemed Paid Taxes: $10.50GILTI basket capacity: $10.29GILTI FTC: $(10.29)Residual US Tax $0.21

Total Residual US Tax $0.21Lost FTCs: ($0.21)

The real world: GILTI problem #1 FTC capacity

FTC CapacityGILTI Income $50.00Less: Expense Allocation $(1.00)Net GILTI Income $49.00Capacity $10.29

USP

CFC

CFCGross Income $100

Deductions $(0)

Tangible Assets $0


Tax rate: 13.125%


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USP

CFC1 CFC2

CFC1 CFC2Gross Income $200 $100

Deductions $(25) $(110)

Tangible Assets $100 $100

Excluded Interest

$2.50 $5

Foreign Taxes $10 $2

GILTI Amount CalculationNet CFC Tested Income

CFC1 Tested Income (Loss) $165.00 CFC2 Tested Income (Loss) $(12.00)Total $153.00

Net Deemed Tangible Income Return10% of QBAI $10.00 Excluded Interest $(7.50)Total $2.50

GILTI Amount $150.50

GILTI Deemed Paid Taxes CalculationInclusion Percentage

GILTI Amount $150.50 Tested Income $165.00 Inclusion Percentage 91.2%

GILTI Haircut 80.0%Tested Foreign Income Taxes $10.00 GILTI Deemed Paid TaxesSection 78 Gross Up

$7.30$9.12

Deduction CalculationsGILTI Deduction $79.81

Residual US Tax CalculationGILTI $79.81Assumed Expense Allocation $0.00US Corporate Rate 21%Tentative US Tax $16.76 Less: GILTI Deemed Paid Taxes $7.30Residual US Tax (Excess FTCs) $9.46

The real world: GILTI problem #2 losses give and take away


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Details

Flight Structuring into high-taxed Subpart F income through operational or structural changes

FTCs can be claimed currently, or deferred and selectively claimed through Section 956

Fight Changing allocation formulas and inputs: Reduce expenses allocated to GILTI income to increase FTC capacity

Fight Restructure legal entities so that tested loss entities are combined with tested income entities to avoid elimination of QBAI and FTCs from calculations

Approach Description

Away from GILTI and into Subpart F

FTC Limitations

Limit Tested Losses

Approach to GILTI: Fight or flight?

Approach to GILTI: FLIGHT


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High-tax subpart F: The path to territoriality“Natural” Territoriality Limited application because (i) the 10% return allowed for QBAI will exempt

only a small amount of CFC income, and (ii) FOGEI is industry specific

Territoriality via Subpart F?

“High-tax” Subpart F income attracts no residual U.S. tax upon a distribution due to section 245A

Magic creditable foreign tax (“CFT”) ETR for high tax exception is > 18.9% [(90%) * (21%)]HTE Subpart F

ETR = CFTs / (Section 952 taxable income + CFT)

Applies to separate classes of income, including net foreign base company sales income and net foreign base company services income

US Shareholder level expense apportionment is irrelevant


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Optimizing FTCs? — Subpart F inclusions generally convert GILTI basket income to general basket

— If you have excess 1) FTCs after taking into account expense allocation, OFLs, SLLs, etc, and 2) excess general basket income, considerA. Not electing high-tax exception from Subpart F – FTCs can be cross-credited against other general basket

income and are otherwise subject to the 10-year section 904(c) carryforward; orB. Electing the high-tax exception and having a section 956 inclusion in the future – FTCs in the “bank”, although

you have to get into section 956 — And remember that the “old” section 960(c) “hopscotch” rule was repealed

High-tax subpart F: The path to territoriality


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FTC CapacityGILTI Income $50.00Less: Expense Allocation $(1.00)Net GILTI Income $49.00Capacity $10.29

GILTI Amount Calculation $81.0010% of QBAI $0.00

GILTI Amount $81.00

GILTI Deemed Paid Taxes CalculationInclusion Percentage 100%GILTI Amount $81.00 Tested Income $81.00


Section 78 Gross-Up $19.00

Residual US Tax CalculationGILTI

GILTI Income $50.00Tentative US Tax @21% $10.50GILTI Deemed Paid Taxes: $15.20GILTI basket capacity: $10.29GILTI FTC: $(10.29)Residual US Tax $0.21

Total Residual US Tax $0.21Lost FTCs: ($4.91)

GILTI result at high-tax rate

USP

CFC

CFC

Gross Income $100

Deductions $(0)

Tangible Assets $0


Tax rate: 19%Increasing foreign ETR above 13.125% increases lost FTCs but not residual U.S. tax. Residual cost entirely about expense apportionment.


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Subpart F at high-tax rate

Residual US Tax = 0And more exempt income to attract interest expense under section 904(b)(4)

High-Tax Exception CalculationForeign Taxes (a) $19.00FBC Sales Income Item (b) $81.00ETR [a / (a+b)] 19.00%ETR > 18.90? YES

USP

CFC

CFC

FBC Sales Income $81

Deductions $(0)

Tangible Assets $0


Tax rate: 19%


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FTC CapacitySubpart F Income Plus 78 $100.00Less: Expense Allocation $ (1.00)Net GL Income $ 99.00Capacity $ 20.79

Subpart F Calculation w/o High-Tax Exception

Sec. 951 Inclusion $75.00Deemed Paid Foreign Income Taxes $25.00

Residual US Tax CalculationIncome

Subpart F $75.00Section 78 Gross-Up $25.00

Tentative US Tax @21% $21.00Subpart F Deemed Paid Taxes: $25.00GL basket capacity: $20.79GL FTC: $(20.79)Residual US Tax $0.21

Residual US Tax Cost $0.21Not Lost Yet FTCs $4.21

Subpart F at high-tax rate

High-Tax Exception CalculationForeign Taxes (a) $25.00FBC Sales Income Item (b) $75.00ETR [a / (a+b)] 25.00%ETR > 18.90? YES

USP

CFC

CFC

FBC Sales Income $75

Deductions $(0)

Tangible Assets $0


Tax rate: 25%

Moving from GILTI to subpart F


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Affirmative FBC sales income: convert same-country LRD

CFC 1Manufacturing

Services(A)

USP

CFC 2Regional

Distributor(B)

CFC 3In-Country Distributor

(C)

Unrelated Customer in Country C

services

product

product

IP, substantial contribution, regional sales & marketing activities

USP

CFC 2Regional

Distributor(B)

Unrelated Customer in Country C

product

product

product In-CountryDistributor (C)

ManufacturingServices

(A)

CFC Holdco(D)

IP, substantialcontribution, regional sales & marketing activities

Pre-Tax Reform

Post-Tax Reform


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FBC services income: Outside country of incorporation

Pre Tax-reform— Service Provider CFC’s service income from CFC1 was

not FBC Services Income because performed by Country C CFC in Country C

Post Tax-reform— Service Provider CFC elects to be a DRE of a holding

company CFC incorporated in a different jurisdiction (CFC 2), so that “same-country” exception for FBC Services would not apply

Issues— Minimum disruption if CFCs already in place— F reorganization qualification if CFC2 is newly formed

Also consider guarantees and substantial assistance

services

CFC 1(A)

USP

CFC 2 HoldCo

(B)

I/C Services Performed in Country C for CFC1

Service Provider

(C)

Approach to GILTI: FIGHT


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Fight – CFC stock apportionment: Managing the E&P bump

USP

CFC

Item CFC Basis

Begin @1/1/2018 $500

E&P on 1/1/2018 $1000

Combined 1/1/2018 basis w/E&P “Bump”

$1500

2018 current E&P $100

Distribution $1100

Final E&P $0

12/31/2018 Basis plus E&P Bump $500

Average Basis $1000

FTC CapacitySubpart F Income Plus 78 $100.00Less: Expense Allocation $(1.00)Net GL Income $99.00Capacity $20.79

USP Interest Expense Apportionment

Interest Expense $500

BOY U.S. Tax Asset Basis $3000EOY U.S. Tax Asset Basis $4000Average $3500

BOY CFC TBV $1500EOY CFC TBV (with Distribution) $500Average $1000

BOY CFC TBV $1500EOY CFC TBV (w/o Distribution) $1600Average $1550

% of Interest Expense Allocated to CFC Stock

With Distribution:[(1000) / (1000+3500)] = 22.2%

Without Distribution[(1550) / (1550+3500)] = 30.7%


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USP

CFC1

DRE(F/K/ACFC2)

CFC1 DRE Total

Gross Income $200 $100 $300

Deductions $(25) $(110) ($135)

Tangible Assets $100 $100 $200

Excluded Interest $2.50 $5 $7.5

Foreign Taxes $10 $2 $12

AnalysisGILTI Amount Calculation

Net CFC Tested IncomeCFC1 Tested Income (Loss) $153.00

Net Deemed Tangible Income Return10% of QBAI $20.00 Excluded Interest $(7.50)Total $12.50

GILTI Amount $140.50

GILTI Deemed Paid Taxes CalculationInclusion Percentage

GILTI Amount $140.50 Tested Income $165.00 Inclusion Percentage 85.2%

GILTI Haircut 80.0%Tested Foreign Income Taxes $12.00 GILTI Deemed Paid TaxesSection 78 Gross Up

$8.17$10.24

Deduction CalculationsGILTI Deduction (GILTI + 78 Gross Up) $75.37

Residual US Tax CalculationGILTI+78 – GILTI deduction $75.37Assumed Expense Allocation $0.00US Corporate Rate 21%Tentative US Tax $15.83 Less: GILTI Deemed Paid Taxes $8.17Residual US Tax $7.66 [Separate CFC result from earlier slide] [$9.46]

Fight – merging tested losses with tested income

Other thoughts


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Minimum Tax via Deduction and FTCs, not Exemption— Domestic results matter

— Expense allocation and domestic FTC rules matter

21% not 25% or 28%— FTCs less valuable but lots of excess FTCs

80% FTCs and No Carryovers— Foreign taxes matter more – double taxation is easier

We really care about intangible income (so defined)— Complexity and confused incentives1962 Anti-deferral rules, not just passive income— Complexity and optionality; equal application to both corporations and individuals

5 fateful decisions


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General Rule. For tax years beginning after 12/31/17, “business interest” is only deductible to the extent of 30% of the taxpayer’s “adjusted taxable income” (“ATI”)— ATI for corporations=taxable income with net interest expense and NOL deduction added back, plus also

depreciation, amortization, and depletion for years beginning before 1/1/2022

No indication in legislative history of whether New 163(j) intended to apply at the CFC level (compare footnote indicating 245A available for Subpart F computation) — On the other hand, not expressly limited to domestic corporations or U.S. persons

Under Old 163(j), foreign corporations not subject to the rule unless they were engaged in USTB and had ECI (Prop. Reg. 1.163(j)-8)

Notice 2018-28 announced government’s intention to withdraw Old 163(j) proposed regulations

New Section 163(j) at the CFC level


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Example. — CFC1 pays $50 of interest to CFC 2 foreign

disregarded entity (DRE) that is treated as a branch of CFC2.

— Assume CFC1 has $50 of taxable income after payment of interest expense, and thus $100 of ATI

— If New 163(j) applies for GILTI without coordination, then CFC1 only is allowed to deduct $30 of the interest expense while CFC2 must still include the $50 of interest income.

— Altogether CFC1 and CFC2 go from combined $250 of Tested Income to $270, increasing US Co’s initial GITLI inclusion by $20.

CFC1 CFC2

US Co

Tested IncomeCFC1 CFC2$100 income $150 income-($30) interest expense +$50 interest income_______________ ___________$70 $200$250 tested income $270 tested income

$$

New 163(j): GILTI double-counting trap


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General Rule. No deduction for “disqualified” related pay amounts paid or accrued pursuant to (i) a hybrid transaction, or (ii) by, or to, a hybrid entity.— Passive wording—”no deduction shall be allowed…” without any limitation on status of payor

Definitions/Operating Rules.— A disqualified related-party amount: any interest or royalty paid or accrued to a related party if:

— No corresponding income inclusion to related party under local tax law; or— Related party allowed a deduction with respect to payment under local tax law.

— Exception: payments resulting in Subpart F inclusion for U.S. shareholder.— Query: Why no exception for GILTI?

Hybrid deduction rule: New section 267A


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Hybrid deduction rule: GILTI double-counting trap

Example. — CFC1 pays $50 royalties or interest to foreign

disregarded entity (DRE) that is treated as a branch of CFC2. DRE has local tax ruling exempting the payment and thus it falls within Sec. 267A (paid to hybrid entity, not included in foreign tax base).

— If Sec. 267A applies for GILTI without coordination, then CFC1’s $100 of tested income remains the same despite the payment, while CFC2’s tested income is still increased by the $50.

— Altogether CFC1 and CFC2 go from combined $250 of Tested Income to $300, increasing US Co’s initial GITLI inclusion by $50.

— Note that payments from US Co to CFC2 would likely be Subpart F income (no “look-through”) and would qualify for 267A exception.

CFC1 CFC2

US Co

$$ DRE

Tested IncomeCFC1 CFC2$100 income $150 income-($50) royalty +$50 royalty+$50 disallowance (no adjustment) _______________ ___________$100 $200$250 tested income $300 tested income


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Other GILTI imponderablesInteraction of Section 250 limitation with other provisions that also use a taxable income limitation (e.g., Section 163(j) ATI)

How exactly to determine tested income and expenses of a CFC— Rules similar to Reg. 1.952-2 in computing Subpart F income?— Will accounting methods previously adopted (intentionally or not) under 952 and 964 automatically carryover?

E.g., what if CFC previously used GAAP depreciation for E&P and now must compute QBAI using ADS?— If a method change is made in 2017/2018, will 481(a) adjustments spread into GILTI years be taken into

account in tested income/loss? (Consider interaction with Sec. 965 AAR for method changes in Notice 2018-26)

Questions?

Thank you

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 613174

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From the Deferral Frying Pan into the Worldwide Fire – Rethinking CFC Taxation · 2020-02-27 · 2018 U.S. Cross-Border Tax Conference May 15 – 17, 2018 kpmg.com From the Deferral