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Spotlight

Congress returns to Washington next week to begin the 115th Congress. Topping the agenda for the new Congress and incoming Trump Administration will be US tax reform. The starting point for the legislative effort in the House is expected to be the House Republican Blueprint for Tax Reform, which was released this past June and includes a novel provision for border adjustments. Under the proposal, border adjustments would exclude US exports from the tax base while including imports. This represents a major departure from the current corporate income tax. It would transform the consumption-based tax Blueprint plan to a destination-based tax on domestic consumption and significantly affect exporters, importers, consumers and trade.

During the holidays, it was reported that House Ways and Means Committee Chairman Kevin Brady (R-TX) was having ongoing discussions with the Trump transition team on all aspects of the House Blueprint, including the proposed border adjustment tax. It is not clear how President-elect Trump views this aspect of the House tax plan, however. President-elect Trump’s team has floated the idea of a tariff on imports as high as 10%, which reportedly could be implemented either by executive order or as part of a tax reform package that includes the border adjustment proposal.

The IRS issued final passive foreign investment company (PFIC) regulations on 27 December, keeping its word that it would not allow temporary PFIC regulations which were set to sunset on 30 December 2016 to expire before they were finalized. The final regulations provide guidance on determining ownership of a PFIC and certain annual reporting requirements for PFIC shareholders to file Form 8621. The final regulations also contain guidance on the exception to the requirement for certain shareholders of foreign corporations to file Form 5471.

The government originally published final, temporary and proposed regulations under Sections 1298, 6038 and 6046 on 31 December 2013, on determining ownership of a passive foreign investment company and on the annual filing requirements for PFIC shareholders. The temporary and proposed regulations specifically provided guidance on reporting requirements applicable to shareholders of a PFIC. In April 2014, the IRS issued Notice 2014-28, announcing that it would amend the definition of "shareholder" in the Section 1291 regulations to exempt US persons who indirectly own stock in PFICs through certain tax-exempt accounts and entities from being required to file Form 8621 for those PFICs under Section 1298(f). In September 2014, the Service issued Notice 2014-51, announcing that it would amend the Section 1298(f) regulations to create an exception from its filing requirements for US persons holding PFIC stock that is marked to market under Section 475 or another code section other than Section 1296.

The final PFIC regulations clarify an outstanding issue from the temporary regulations related to when a US person is treated as indirectly owning stock of a foreign corporation through a US corporation. A non-duplication rule is added to the final regulations that limits the effect of overlapping ownership caused by the attribution rules. The final regulations provide that, solely for determining whether a person owns 50% or more in value of the stock of a foreign corporation that is not a PFIC, a person who directly or indirectly owns 50% or more in value of the stock of a domestic corporation is considered to own a proportionate amount (by value) of any stock owned directly or indirectly by the domestic corporation. However, the non-duplication rule states that a US person will not be treated as owning stock of a PFIC that is directly owned or considered owned indirectly by another US person.

The new final PFIC regulations adopt the 2013 proposed regulations, as amended, including implementing the rules described in Notice 2014-28 and Notice 2014-51. The 2013 temporary regulations are removed. The final regulations were effective on 28 December 2016.

Finally, the US and Argentina signed a first-ever tax information exchange agreement on 23 December. There is currently no US-Argentina income tax treaty in force.