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Talking Tax: Reform readiness, rulemaking activities, and key considerations for industrial products companies

22 March, 2018

John Livingstone
Industrial Products Tax Leader, PwC US

I recently hosted our latest quarterly ‘Talking Tax’ executive webcast focusing on tax reform readiness for industrial products companies. The webcast was intended to provide tax executives in the industrial products sector with an update on rulemaking activities in Washington relative to tax reform and to highlight certain technical issues for them to consider as they prepare for Q1 reporting.

Government guidance around tax reform

Scott McCandless, a principal in our Tax Policy Services practice, shared his insights around how the government is prioritizing guidance in areas that have ‘immediate’ and ‘early financial statement impacts’ affecting industrial products companies. Among the guidance areas that Scott highlighted are those related to the Section 965 repatriation toll charge (the IRS has issued two Notices, a Revenue Procedure, and Frequently Asked Questions) and the expected Section 163(j) limitation on net business interest expense deductibility. Additional guidance areas expected include the Section 162(m) changes to executive compensation, cost recovery under Section 168, and the Section 367(d) transfer of intangibles.

Industrial products companies are interested in such guidance, with our webcast attendees saying that their companies are most interested in seeing guidance around GILTI (21%), the Section 163(j) limitation on net business interest expense deductibility (18%), the toll charge (14%), and the BEAT (14%).

Elizabeth Nelson, a managing director in our International Services practice discussed some of the mechanics around the Section 965 repatriation toll charge, including the ability to take foreign tax credits for withholding taxes related to previously taxed income. Elizabeth also discussed Revenue Procedure 2018-17, which modifies existing procedures for changing the annual accounting period (tax year) of certain foreign corporations whose US shareholders are subject to the toll charge. Under the revenue procedure, which applies to any request to change a tax year otherwise ending on December 31, 2017, certain foreign corporations may not change their tax year that otherwise begins on January 1, 2017, and ends on December 31, 2017.

With respect to their company’s historical foreign earnings taxed under the toll charge, 13% of our webcast attendees said that they are maintaining their permanent reinvestment assertion, 10% are changing their assertion with respect to certain earnings, 4% are changing their assertion with respect to all earnings, and 32% are still evaluating. Given the complexity of the evaluation and the interpretive technical issues that continue to exist related to cash repatriation, it will be interesting to see how many companies are still evaluating their APB 23 assertions after Q1.

Issues around the BEAT and GILTI provisions

During the second half of our broadcast, Quyen Huynh, a principal in our International Tax Services practice, and Marco Fiaccadori, a principal in our Transfer Pricing practice, discussed the new BEAT and GILTI provisions. Quyen addressed the following issues around the BEAT:

  • Is the tax applied on a consolidated or single entity basis?
  • Applicable ‘base erosion percentage’ of NOL deduction?
  • To what extent is a service payment, with both cost and markup components, added back?
  • Reducing regular tax liability through foreign tax credits?
  • What if income is already subject to tax as effectively connected income or GILTI?
  • Tracking of interest deductions to related vs. unrelated parties?
  • Application to partnerships?

Quyen and Marco also discussed some gray areas around characterization issues, including:

  • Base erosion tax benefit does not include reduction to gross receipts by reason of COGS (i.e., inventory costs for US federal income tax purposes).
  • Proper federal tax accounting treatment (e.g., under Section 263A uniform capitalization rules) may be determinative — certain costs (e.g., royalties, buying commissions, certain service costs) related to the production or resale of inventory property may be capitalized into inventory (either to inventoriable costs or COGS) based on the Section 263A rules.

In assessing the application of the BEAT, 21% of our webcast attendees said that their companies are estimating no, or nominal, BEAT expense. Another 9% are estimating a BEAT expense for 2018 and 2019, 4% are estimating a BEAT expense for 2019, but not 2018, and 31% of the respondents are still evaluating. The large number of respondents reporting that they are still evaluating their BEAT exposure is a testament to the potential application of the provision to many US MNCs.

Marco led our discussion on the new GILTI provisions, including the computation of tested income (defined to exclude ‘any item of income described in Section 952(b)’) and the application of Section 163(j) at the CFC level (which could affect the amount of GILTI) and the application of Section 267A (which could result in certain deductions for E&P purposes that could increase GILTI).

Marco then highlighted other topical GILTI issues including:

  • Whether tangible property of a CFC without tested income or a loss CFC can count towards qualified business asset investment.
  • Whether by using the term ‘tested income’ rather than ‘net CFC tested income,’ taxes paid or accrued by CFCs with tested losses can be used to offset US tax owed on the GILTI.
  • How expense apportionment to GILTI income can result on residual US tax still may be owed even with a foreign effective rate of 13.125% or more.
  • Whether Section 904(d)(3) look-through applies to treat dividends, interest, rents, and royalties received by US shareholders from a CFC as income in the GILTI basket.
Looking ahead

Tax reform was intended to improve US competitiveness and productivity through lower corporate tax rates, a modernized international tax system, and incentives to invest in the United States. In light of the new tax law, it is critical that industrial products companies reassess their business models and look at how recent legislative changes may affect their operations. Join us on April 10, 2018, for our next segment of Talking Tax, where we will continue our discussion around tax reform readiness for industrial products companies.