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Talking Tax rewind: Tax and trade policy, GILTI regs, and toll charge updates

30 October, 2018

John Livingstone
Industrial Products Tax Leader, PwC US

I recently hosted our quarterly ‘Talking Tax’ webcast, continuing with this popular series. We covered a number of relevant topics, including US tax and trade policy developments, proposed global intangible low-taxed income (GILTI) regulations, and recent toll charge developments.

Impact of midterms on US tax policy

Scott McCandless, a principal in our Tax Policy Services practice, and Janice Mays, a managing director in our Tax Policy Services practice, joined me on our first panel to discuss how this year’s midterm election outcomes could affect US tax policy. The outcome of the midterms could be significant with respect to how Congress addresses the House-passed tax reform ‘2.0 package’ that would make permanent certain individual and pass-through business tax provisions, including the Section 199A deduction for certain pass-through business income, currently scheduled to expire at the end of 2025.

Interestingly, over a quarter (28%) of our webcast attendees think that Republicans will maintain control of both the House and the Senate, while a quarter (25%) think that Democrats will win the House, but Republicans will maintain control of the Senate.

New North America trade agreement

Scott and Janice turned to the new North American trade agreement — a revision of the North American Free Trade Agreement (NAFTA) — which will be called the United States-Mexico-Canada Agreement (USMCA). USMCA preserves tariff-free access across North American borders, puts in place some new regulatory requirements, especially for the automotive sector, and otherwise alters existing market access and trade rules. The new agreement between Canada, Mexico, and the United States likely will be signed on November 29 or 30.

While USMCA may alleviate concerns of significant tariffs being imposed on most goods traded among the three countries, however, it still must be ratified. Parliamentary ratification is expected to pass in Canada, while in Mexico, the Mexican Senate is expected to ratify the deal easily in 2018. Both chambers of the US Congress must ratify USMCA before it goes into effect. Such ratification is possible in 2019, with the agreement entering into effect in 2020. If USMCA is not ratified, then the existing NAFTA will remain in place, providing a continuation of the North American trading region.

US-China trade fight

Scott and Janice then discussed US-China trade relations. The United States Trade Representative on September 17 announced that the United States will impose a 10% duty on an additional $200 billion of Chinese goods, beginning September 24, with an increase to 25% at the beginning of 2019. This action brings the total amount of Chinese goods subject to tariffs to approximately $250 billion. China announced that it would retaliate with tariffs on an additional $60 billion of US goods. President Trump threatened another round of tariffs on approximately $267 billion of additional imports if China takes retaliatory action.

Surprisingly, almost half (46%) of our webcast attendees said that recent US tax and trade policy developments have not been significant enough for them to consider changes to their supply chains in 2018. However, nearly 30% of our webcast attendees said that they have considered changes to their supply changes as a result of US tax policy developments (9%), US trade policy developments (9%), or both US tax and trade policy developments (10%).

Proposed GILTI regulations

Charlie Markham, a principal in our International Tax Services practice, and Prae Kriengwatana, a director in our International Tax Services practice, joined me on our the second panel to discuss the proposed global intangible low-taxed income (GILTI) regulations and recent toll charge developments.

The IRS and Treasury on September 13 released proposed GILTI regulations under new Section 951A. The new GILTI provisions impose a current US tax on a US shareholder’s pro rata share of its GILTI. The GILTI regulations are among the most complex provisions in the 2017 tax reform legislation, as the concept is comparable to a minimum tax on foreign income.

The proposed GILTI regulations provide guidance on (1) GILTI mechanics, (2) partnership rules, and (3) adjustment to earnings and profits (E&P)/basis for tested losses. The proposed regulations also include modifications to the pro-rata share anti-avoidance rule under existing Sections 951 and 1502 regulations.

Several issues left for future guidance include (1) expense apportionment, (2) Section 904 look-through, (3) foreign tax credit computational rules relating to GILTI, (4) Section 250 mechanics, and (5) interaction with Sections 163(j), 245A, and 267A. A senior Treasury official said a second and third set of proposed GILTI regulations will be issued.

Charlie and Prae went through a number of helpful examples under the new regulations, including (1) the pro-rata share anti-abuse rule, (2) the property transfer anti-abuse rules, (3) the Subpart F rules and test income income computation, and (4) basis adjustment and tracking tested losses.

When asked which of the areas for which guidance is pending are most likely to impact their GILTI tax liability, our webcast attendees said (1) expense apportionment under Section 861 (30%), (2) application of Section 163(j) (if applied at the controlled foreign corporation (CFC) level) (10%), (3) Section 904 look-through (7%), (4) transactions caught under the Section 267A hybrid rules (4%), and all of the above (49%).

Toll charge developments

Charlie and Prae next turned to recent toll charge developments. The IRS and Treasury on August 1 released proposed ‘transition tax’ regulations under Section 965, which imposes a one-time toll tax on the undistributed, previously untaxed post-1986 foreign earnings and profits of certain US-owned corporations as part of the transition to a new hybrid territorial tax regime. Treasury and the IRS hope to finalize the Section 965 regulations by the end of 2018.

The IRS on October 1 issued Notice 2018-78, which provides that the final Section 965 regulations will extend the time period by which taxpayers falling under a transition rule must make certain basis adjustments with respect to each deferred foreign income corporation or E&P deficit foreign corporation under the proposed Section 965 regulations. Such elections will be revocable if made prior to the issuance of final regulations, and for up to 90 days after the date the final regulations are published. The Notice also indicates that the final regulations will revise certain rules for determining the aggregate foreign cash position by treating all members of a consolidated group that are US shareholders of a specified foreign corporation as a single US shareholder.

When asked which areas of Section 965 they have found most challenging, our webcast attendees said (1) availability of data to determine E&P, cash position, and other attributes (20%); (2) lack of clarity regarding payment, reporting, and compliance (14%); (3) computing foreign tax credits associated with Section 965 (9%); (4) application of the anti-abuse/disregarding rules (6%); and all of the above (51%).