Practical considerations from the final and proposed Section 245A regulations

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September 2020

Overview

Treasury and the IRS on August 27, published Final Regulations and 2020 Proposed Regulations under Section 245A, as enacted by the 2017 tax reform legislation (the Act), and Sections 954 and 6038. On June 18, 2019, Treasury and the IRS had published temporary regulations (2019 Temporary Regulations) and cross-referenced the proposed regulations under Sections 245A, 954, and 6038 (2019 Proposed Regulations). As of August 27, 2020, the 2019 Proposed Regulations are finalized, and the 2019 Temporary Regulations have been removed. 

The Final Regulations generally adopt the approach and the structure of the 2019 Proposed Regulations with certain modifications. The 2020 Proposed Regulations provide detailed mechanics for the coordination of the extraordinary disposition rules under the Final Regulations and the disqualified basis rules under the 2019 final global intangible low-tax income (GILTI) regulations.

The Final Regulations are effective for tax years ending on or after June 14, 2019, while the 2019 Temporary Regulations remain effective for prior tax years that include distributions made after 2017. In cases where the Final Regulations and the 2019 Temporary Regulations both could apply, the Final Regulations take precedence. The 2020 Proposed Regulations are intended to be effective for tax years of foreign corporations beginning on or after the date of publication of the regulations as final in the Federal Register. Both the Final and 2020 Proposed Regulations allow for retroactive application, provided that the respective regulations are applied consistently. 

The takeaway

The Final Regulations provide clarifications of and revisions to certain rules in the 2019 Temporary and 2019 Proposed Regulations. For those taxpayers subject to the ED rules, the 2020 Proposed Regulations should be evaluated in detail to determine whether any potential reductions to ED accounts or disqualified basis in specified property may be available.

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Doug McHoney

International Tax Services Leader, PwC US

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