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Talking Tax recap: Tax policy, taxing the digital economy, and the recently released GILTI regulations

27 August, 2019

John Livingstone
Industrial Products Tax Leader, PwC US

I recently hosted the latest installment of our popular quarterly ‘Talking Tax’ webcast series. This episode covered a number of relevant topics, including tax policy, taxing the digital economy, and the recently released GILTI regulations. Below are some of the highlights from the webcast.

Tax policy

Todd Metcalf, a principal in our Tax Policy Services (TPS) practice, and Janice Mays, a managing director in our TPS practice, joined me on our first panel to discuss tax policy. The 2020 presidential election campaign season is underway and is expected to have an effect on tax legislation this year, with President Trump running for re-election and with over 20 Democrats running for president, some of whom are highlighting tax policy as a campaign issue. These discussions are causing some concern around the long-term sustainability of tax reform.

Congress has departed for its summer recess and will return the week of September 8. Prior to the start of its recess, Congress passed a two-year bipartisan budget agreement suspending the statutory federal debt limit until July 31, 2021, and establishing overall discretionary spending caps for fiscal years beginning October 1, 2019 (FY 2020) and October 1, 2020 (FY 2021). When lawmakers return in September, the focus will be on passing FY 2020 appropriations bills.

The House Ways and Means Committee on June 20 approved tax extender legislation addressing a number of expired and expiring business and individual tax provisions to retroactively renew temporary tax provisions through December 31, 2020. The measure includes certain 2019 expiring tax provisions.

The Senate Finance Committee has not approved tax extender legislation. Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) on March 4 introduced a bill (S. 617) to retroactively renew tax provisions that expired at the end of 2017 and 2018; however, the Grassley-Wyden bill does not address 2019 expiring tax provisions. The Finance Committee also established six bipartisan task forces to review and make recommendations on tax extenders.

Treasury and the IRS have stated that they intend to finalize the BEAT regulations by mid-to-late summer and the expensing regulations by late summer. Our panel discussed how industrial products companies are facing uncertainty regarding the finalization of the tax reform guidance, as well as the complexity of complying with the new law. These companies also are concerned that other tax issues — technical corrections to the 2017 tax reform legislation, IRS reforms, retirement and savings provisions, innovation incentives, and disaster tax relief — are unresolved.

When we asked our attendees their outlook on the likelihood of corporate tax legislation this calendar year, 26% said this is very unlikely that we see anything, 21% said that enactment of extenders only is likely, 18% said that enactment of extenders and technical corrections is likely, and 12% said that enactment of technical corrections only is likely.

Taxing the digital economy

Pat Brown, a principal in our US International Tax Policy Services practice, joined me on our second panel to discuss the challenges of taxing the digital economy. The taxation of the digitalization of the global economy impacts all industries and continues to be a focus for multinational industrial products companies.

The key factors driving the activity on taxing the digital economy include enhanced technology, globalization, competition concerns, revenue needs, and public sentiment. Policymakers maintain that fundamental changes to the international tax system are required to fairly tax the value created from these activities in the jurisdictions where that value is earned.

The OECD’s Inclusive Framework (IF) on May 31 released its Work Plan for the Digitalizing Economy Project covering the next 18 months. The Work Plan notes the IF’s aim of finding a consensus-based long-term solution for a new international tax architecture that addresses both the allocation of taxing rights and nexus, as well as unresolved BEPS issues.

The G20 Finance Ministers endorsed the Work Plan at the June G20 meeting. The G7 tax roadmap on the digital economy agreed to by the G7 Finance Ministers at their July meeting supports a two-pillar solution to be adopted by 2020 through the Work Plan endorsed by the G20 Finance Ministers.

While acknowledging that many gaps might exist between how jurisdictions may unilaterally approach these issues, the Work Plan establishes an aggressive timeline for considering the development of rules and design standards to feed into delivering a unified framework acceptable to the IF. Important anticipated milestones include a progress report in December 2019, ongoing Working Party discussions throughout 2019 and 2020, and a final report to the G20 by the end of 2020.

When we asked our attendees what impact they believe the OECD’s digital initiative will have on their company’s ETR, 51% said that it was too early to know, 17% said that it will be immaterial because they have robust transfer pricing in place and don’t believe any new rules will materially impact them, and 8% said that it will be negative because the increased non-US tax without an offsetting US FTC will result in a higher ETR.

Breakthrough on US tax treaties

Janice joined me on our third panel to discuss the recent breakthrough on US tax treaties. The Senate on July 16 voted to ratify a protocol to the existing income tax treaty with Spain and on July 17 voted to approve protocols to the existing income tax treaties with Switzerland, Japan, and Luxembourg.

Both the Luxembourg and Switzerland protocols amend the information exchange article. The Spain and Japan protocols contain more in-depth changes and amend the anti-treaty shopping article, the limitation on benefits article, and withholding provisions, among other changes. President Trump must sign an instrument of ratification and certain diplomatic notifications and exchanges of instruments must occur in order for the protocols amending the treaties to enter into force.

The Senate next may take up tax treaties with Chili, Hungary, and Poland and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The tax treaty with Norway has been initialed and is awaiting signature. Tax treaties with the United Kingdom and Vietnam are in negotiations.

Final and proposed GILTI regulations

Pat joined me on our fourth panel to discuss the recently released GILTI regulations. Treasury and the IRS on June 14 released final GILTI regulations providing guidance to US shareholders regarding the pro rata share of their GILTI. The final regulations retain the structure of the proposed regulations and are effective back to the date of enactment of the 2017 tax reform legislation. Treasury and the IRS received a large number of comments on the proposed regulations, but the vast majority of them were not adopted in the final regulations. Taxpayers filing 2018 tax returns will be need to review the final regulations and make necessary adjustments in light of the guidance.

Treasury and the IRS on June 14 also released proposed GILTI regulations providing guidance on carving out an exception from GILTI’s gross tested income for certain income subject to ‘high tax’ in a foreign jurisdiction. The proposed regulations provide that this high-tax exception applies to tested income subject to an effective rate greater than 18.9% and is determined on a qualified business unit (QBU)-by-OBU basis. The all-or-nothing election for all CFCs within a controlling domestic shareholder group is made and revoked by the controlling US shareholder — a 60-month waiting period applies to re-elect once the election is revoked. No qualified business asset investment of high-tax electing QBU is taken into account and no taxes attributable to high-tax tested income are deemed paid under Section 960(d).