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