Current Developments in International Taxation – Outbound Update

Florida Bar Tax Section and FICPA35th Annual International Tax ConferenceMiami, FloridaJanuary 5-6, 2017

Larry R. KemmCarlton Fields P.A.Lkemm@carltonfields.com

Legislative Update

No Outbound Tax Legislation Passed in 2016

President Obama Budget Proposal• Virtually identical to prior year tax proposals

President’s Framework for Business Tax Reform• 19% minimum tax on foreign earnings• 14% tax on unrepatriated foreign earnings

GOP Tax Reform Task Force

Proposed Legislation• Proposals targeted at inversions

Outlook for 2017

Final Regs. – PFIC Reporting Requirements

T.D. 9806 – Final Regs. (Dec. 27, 2016)

Indirect Ownership Clarified

• U.S. person not treated as PFIC shareholder if stock held through a tax-exempt organization or account

• Non-duplication rule excludes PFIC stock indirectly held through a domestic corporation for purposes of testing 50% holding (by value)

Exceptions to § 1298(f) Reporting

• PFIC stock marked to market under non-§ 1296 provision

• Domestic p’ship when no direct or indirect partners are required to file

• Indirect holding through foreign pension fund covered by treaty (w/o regard to whether pension fund is a “trust”)

Final Regs. – PFIC Reporting Requirements

Exceptions to § 1298(f) Reporting . . . cont’d

• Dual resident taxpayers and bona fide residents of U.S. territories (Guam, Northern Mariana Islands, and USVI)

• De minimis holdings – value of all PFIC holdings not more than $25k, or value of PFIC stock owned indirectly is $5k or less

PFIC: Annual Reporting Under § 1298(f)

Treas. Reg. § 1.1298-1(g) – Ex. 4

§ 1298(f) reporting by individual E:

• No reporting for A because P’ship X is lowest tier U.S. owner in chain

• No reporting for B (because P’ship X timely filed Form 8621)

• Value of A & B is ignored to determine if E qualifies for $25k exception

• Form 8621 must be filed for C

• $5k exception applies with respect to indirect interest in D

EXAMPLE 4

C Corp(PFIC)

A Corp(PFIC)

• Partnership X made timely QEF election for B• Neither a QEF nor mark-to-market election made for A, C or D• E did not receive excess distribution or recognize gain treated

as an excess distribution for A Corp, C Corp or D Corp

D Corp(PFIC)

Value = $30x

Value of indirect interests = $10x each

E(U.S.

Citizen)

X(US P’ship)

B Corp(PFIC)

Value = $30x

Value = $30x

Value of indirect interest

= $3x

Value = $10x

Outbound Transfers of Intangibles

T.D. 9803 – Final Regs. (Dec. 16, 2016)

• Adopt with changes proposed regs released in 2015

• Narrow scope of active trade or business exception for outbound transfers of tangible property under § 367(a)

• Eliminate exception for outbound transfers of foreign goodwill and going concern value under § 367(d)

• Decline to adopt several comments, including suggested exception for foreign goodwill & going concern value developed by a foreign branch that is later incorporated

• Restores 20-year limitation on useful life on a qualified basis

• Minor non-substantive wording changes also made to temporary regs

Section 987 Regs. – QBU Terminations

T.D. 9794 – Final Regs. (Dec. 7, 2016)

• Owner of § 987 QBU that terminates must include net unrecognized § 987 gain or loss in income for year of termination

• QBU terminates upon actual or deemed transfer of substantially all assets of the QBU, or when QBU’s owner ceases to exist

T.D. 9795 – Temp. and Prop. Regs. (Dec. 7, 2016)

• Defers § 987 losses from certain termination events and partnership transactions if QBU assets and liabilities remain subject to § 987

• No selective recognition of § 987 losses in certain outbound transfers

Notice 2017-7 (Dec. 22, 2016)

• Anti-abuse rule modifies effective date for retroactive CTB elections

Final Section 956 Regulations

T.D. 9792

• Expand anti-avoidance rule to include transactions involving partnerships that are controlled by a CFC

• Address certain U.S. property indirectly held by a CFC as well as certain foreign partnership distributions funded by CFCs

• Revise active development and active marketing tests for active rents and royalties exception to foreign personal holding company income

• Determine a CFC partner’s share of partnership property for purposes of § 956

• Determine extent to which foreign partnership obligations are treated as U.S. property (including pledges / guarantees by CFCs & partnerships)

Expanded Section 956 Anti-Avoidance Rule: Treas. Reg. § 1.956-1(b)(1)

• Example 4:• Foreign Bank is an unrelated

foreign financial institution

• A principal purpose for the transactions is to avoid the application of § 956 with respect to FS1

• FS1 deposit with Foreign Bank is considered a funding by FS1 of FS2

• FS1 is considered to hold indirectly U.S. property represented by the FS2 loan to USP

EXAMPLE 4

USP

FS1

• FS1 has substantial accumulated E&P• FS2 has no E&P

Loan to FS1 of $100x

FS2

100% 100%

ForeignBankDeposit of $100x

Loan to USP of $100x

Coordination Rule: Treas. Reg. § 1.956-1(c)

Example 8:• A principal purpose of funding

FPRS is to avoid the application of § 956 with respect to FS2

• FS2 controls FPRS

• FS2 is treated as holding U.S. property in amount of $100x

$60x by virtue of controlling FPRS (limited by coordination rule)

$40x via deemed partner share

• USP does not have an income inclusion under §§ 951(a)(1)(B) & 956 with respect to FS1 related to the USP obligation held by FPRS

EXAMPLE 8

USP

FS1(CFC)

FPRS

• Both FS1 and FS2 have substantial E&P

LVP60%

LVP40%

$100x loan

FS2(CFC)

$100x loan

Debt / Equity Regulations

T.D. 9790 – Final, Temp. and Prop. Regs. issued Oct. 13, 2016• Scaled back but retained certain controversial aspects of proposed regs.

issued earlier in year

Key features• Documentation requirements – must be satisfied for related-party debt

instruments to be respected as debt

• Funding rule – creates irrebuttable presumption that direct or indirect funding within 3 years on either side of a specified transaction has a principal purpose of funding the specified transaction

• General bifurcation not adopted

• Foreign issuers excluded from scope of final and temp regs.

Potential challenges to regulations anticipated

Country-by-Country Reporting

T.D. 9773 – Final Regulations issued June 30, 2016

• Require CbC reporting under § 6038 for U.S. companies that are “ultimate parent entities” of multinational enterprises

• Issued in connection with BEPS agenda

Form 8975 – yet to be released, will require disclosure of multiple items for each “constituent entity”

Apply to U.S. multinationals with a threshold annual revenue of $850 million or more

Implications?

• Audit risk, confidentiality, appropriate use by participating countries, penalties for noncompliance, etc.

Reporting Financial Assets by Specified Domestic Entities

T.D. 9752 – Final Regulations issued Feb. 23, 2016

• Adopt with changes proposed regs. published in Dec. 2011

• Form 8938 reporting required under § 6038D for domestic entity formed or availed of for purposes of holding specified foreign financial assets

• Applies if at least 80% owned by a specified individual, and at least 50% of gross income or assets is passive

Changes from proposed regulations

• Elimination of threshold to determine if entity is treated as a specified domestic entity

• Elimination of subjective principal purpose test

• Clarification of definition of “passive income”

Other Regulatory Developments

T.D. 9800 – Temp. and Prop. Regs. re non-creditable foreign taxesfor covered asset acquisitions under § 901(m)

T.D. 9761 – Anti-Inversion regulations adopting guidance fromNotices 2014-52 and 2015-79

T.D. 9760 – Final Regs. re § 367 coordination rule

T.D. 9748 – Temp. Regs. re partnership allocation of creditable foreign tax expenditures

REG-123600-16 – Prop. Regs. re booking income from CFCs &PFICs by Regulated Investment Companies

Topsnik v. Comm’r, 146 T.C. No. 1 (2016)

Installment obligations attributable to installment sale subject to mark-to-market regime under expatriation rules

• Taxpayer entered into installment sale at a time when he was a U.S. resident (green card holder)

Taxpayer was a covered expatriate under § 877A

• Based on exchange of information with Germany, Tax Court determined that taxpayer was not a German resident in 2010 when he relinquished green card

• Failed to file Form 8854 and certify tax compliance for 5 years leading up to expatriation

Vento v. Comm’r, 147 T.C. No. 7 (2016)

Tax Court denied foreign tax credits under § 932(b)(3) for tax payments “covered into” USVI

• Taxpayers had not filed U.S. tax returns for year at issue on basis they were bona fide residents of the USVI

• Estimated tax paid to IRS was transferred to USVI BIR under § 7654 along with credits from prior years

Tax Court found that petitioners failed to establish that amounts in issue were “taxes paid” under Treas. Reg. § 1.902-2(e)• Failed to exhaust all effective & practical remedies to reduce USVI tax

• Also failed to establish that amounts did not exceed FTC limitation

Acknowledged that decision results in double taxation

Other Notable Outbound Cases

Albemarle Corp. v. United States, Sup. Ct. Dkt. No. 15-886 (2016)• Certiorari denied on case holding that claims for refund were barred by

10-year statute of limitations under § 6511(d)(3)(A)

Estate of Sanders v. Commissioner (11th Cir. Aug. 24, 2016)• Vacated and remanded Tax Court finding that taxpayer was a bona fide

resident of USVI, thereby implicating whether SOL had run

Eshel v. United States (D.C. Cir. Aug. 5, 2016)• Reversed and remanded Tax Court finding that French taxes (CSG and

CRDS) are ineligible for U.S. foreign tax credits

Medtronic v. Commissioner, T.C. Memo 2016-112 (June 9, 2016)

• Tax Court rejected government’s argument that transactions must be aggregated to produce most reliable arm’s-length pricing

Notice 2016-73

Announces plans to issue regulations under § 367 to combat transactions designed to repatriate earnings and basis of foreign corporations without incurring U.S. tax• Modifies prior guidance in Notice 2014-32

Modifications

• Turns off § 367(a) Priority Rule if target is a domestic corporation

• Expands all E&P amount if there is “excess asset basis” with respect to stock of a foreign acquired corporation in an inbound nonrecognition transaction

• Includes new anti-abuse rule for inbound nonrecognition transactions

Effective for transactions (including retroactive CTB elections) completed on or after Dec. 2, 2016

Transaction of Concern: Treas. Reg. § 1.367(b)-10

Example 1:• Per priority rules compare § 367(b)

income (i.e., deemed distribution by FS to FP) to § 367(a) gain

• Assume deemed dividend qualifies for exception under § 954(c)(6)

• USS must recognize $30x deemed dividend and $18x capital gain

• GRA covers remaining $40x of FT stock

• Prior to Notice 2016-73, FP could subsequently liquidate with no income recognized by USP group

EXAMPLE 1

USP

FP

• FP has zero E&P• FS has $60x E&P

USS

FP Stock

FS FTFT

Stock

Step 2:B Reorg

Step 1: FS buys FP stock for $60x cash and $40x FS stock

FMV = $100xAdj. Basis = $20x§ 1248 amt. = $50x

FP stockFMV = $100

Notice 2016-52

Announces plans to issue regulations under § 909 in connection with foreign-initiated adjustments• Targeted at situations where large foreign-initiated adjustment that

relates to a prior taxable year may be separated from related income

• Prompted by tax adjustments required under EU state aid rules

Identifies two new splitter arrangements

• Foreign income taxes paid by successor entities subject to § 905(c)

• Distributions made before the payment of additional tax

Regulations will reallocate foreign income taxes and related foreign income to calculate creditable amount under § 902

Effective for foreign income taxes paid after Sept. 15, 2016

Notice 2016-10

Addresses application of § 853 and § 905(c) to foreign tax refunds received by a regulated investment company• In context of foreign tax treated as paid by RIC’s shareholders under

§ 853(b)(2) pursuant to an election under § 853(a)

• Prompted by European Court of Justice decision that EU member states could not impose withholding taxes on certain foreign investors

Two alternative methods provided for RICs to comply• 1) RIC reduces foreign taxes reported by RIC to its shareholders for

refund year by amount of foreign tax adjustment

• 2) RIC may obtain closing agreement that details treatment of foreign tax refund

Taxpayers may rely on rules described in Notice until such time that regulations are issued

New U.S. Model Income Tax Treaty

Released Feb. 17, 2016, the new Model could result in more situations where treaty benefits are denied and double taxation occurs

Significant changes:• Special Tax Regimes – certain related-party treaty benefits denied if recipient in a

STR (generally the existence of preferential tax rates)

• New Limitation on Benefits Article – new public subsidiary, derivative benefits and headquarters company tests, enhanced base erosion test and more limited active trade or business test

• Payments by “Expatriated Entities” – denies treaty benefits for certain payments made by an expatriated entity for 10 yrs following expatriation

• Subsequent Changes in Law – certain treaty provisions cease to apply if treaty partner reduces corporate income tax rate below a threshold

• Exempt PEs – source country treaty benefits denied for low taxed PE profits or where PE located in non-treaty third state

• Mandatory Binding Arbitration – required for disputes between treaty partners

State Aid Investigations by European Commission

Pending investigations involving U.S.-parented multinationals

• Apple ordered to pay €13 billion on Aug. 30, 2016

Treasury White Paper on State Aid

• Highlights considerable implications for U.S. government & companies in potential lost tax revenue and increased barriers to cross-border investment

• Three major concerns: (i) new approach departs from prior EU case law and EC decisions, (ii) EC seeking retroactive recoveries under new approach, and (iii) approach is inconsistent with international norms and undermines the international tax system

May create the “perfect storm” to prompt U.S. legislative action

Other Treaty Developments

Pending income tax treaties still awaiting full Senate consideration

• Includes income tax treaties with Chile, Hungary and Poland, as well as treaty protocols with Japan, Luxembourg, Spain and Switzerland

Treaty negotiations initiated with Colombia and Argentina

New protocol under negotiation with Luxembourg

• Proposed amendment would deny treaty benefits for income of an enterprise attributable to a permanent establishment in the other Contracting State if such income is taxed at less than 15% or less than 60% of the general statutory company tax rate

• Treaty benefits would also be denied if income is attributed to a PE in a third state that does not have a comprehensive treaty in force with the Contracting State from which benefits are claimed under U.S.-Luxembourg treaty

Thank You!