December 22, 2017 Tax Cuts and Jobs Act significantly affects retail and consumer products industry On December 22, 2017, President Trump signed the "Tax Cuts and Jobs Act" (H.R. 1) (the Act) into law, following approval by the House on December 20 and passage by the Senate on December 19. The Act contains many provisions that will affect taxpayers in the retail and consumer products industry. For an overview of the Act, see Tax Alert 2017-2130. For comprehensive coverage of the business tax provisions, see Tax Alert 2017-2131. For comprehensive coverage of the international tax provisions, see Tax Alert 2017-2166. Business tax reform Lower tax rates The Act lowers the corporate tax rate to 21%, down from 35%, which today is the highest in the industrialized world. This is significant for companies in the retail industry, many of which have the highest effective tax rate among any sector. Additionally, as many companies utilize fiscal years, they will have the benefit of a blended rate under existing Section 15. Existing Section 15, which governs rate changes and was not amended by the Act, will require a "blended" tax rate for fiscal-year taxpayers for their fiscal year that includes January 1, 2018. The effective date provision has caused some confusion because the Act's language provides that the new, lower rate applies for "[tax] years beginning after December 31, 2017," which most people assume (quite reasonably, based on the effective date language) means the lower rate does not apply to fiscal tax years that begin before January 1, 2018. That is, the 21% rate applies for calendar-year taxpayers for their tax years beginning on and after January 1, 2018, and for fiscal-year taxpayers only for their tax years beginning after January 1, 2018. However, that reading is incorrect for fiscal-year taxpayers, as Section 15 redefines the effective date in this context. Section 15(a) provides that, "[i]f any rate of tax imposed by this chapter changes, and if the [tax] year includes the effective date of the change (unless that date is the first day of the [tax] year), then — (1) tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire [tax] year; and (2) the tax for such [tax] year shall be the sum of that proportion of each tentative tax [that] the number of days in each period bears to the number of days in the entire [tax] year." Section 15(c) , in part, provides that, "[f]or purposes of subsection … (a) … if the rate changes for [tax] years 'beginning after' or 'ending after' a certain date, the following day shall be considered the effective date of the change." Interest The provision limits the net interest expense deduction for every business, regardless of form, to 30% of adjusted taxable income. The provision requires the interest expense disallowance to be determined at the tax filer level. Adjusted taxable income for purposes of this provision is modified from the Senate bill and is a business's taxable income calculated without taking into account: (i) any item of income, gain, deduction or loss that is not properly allocable to a trade or business; (ii) any business interest or business interest income; (iii) NOLs; (iv) the amount of any deduction allowed under Section 199A; (v) any deduction allowable for depreciation, amortization or depletion, for tax years beginning before January 1, 2022; and (vi) such other adjustments as provided by the Secretary. Adjusted taxable income also does not include the Section 199 deduction, as it is repealed. The provision exempts taxpayers with average annual gross receipts of $25 million or less for the three-tax-year period ending with the prior tax year. The limitation does not apply, at the taxpayer's election, to any farming business or to a real property trade or business as defined in Section 469(c)(7)(C). The limitation also does not apply to certain regulated public utilities. For purposes of defining floor plan financing, the provision modifies the definition of motor vehicle by deleting specific references to an automobile, a truck, a recreational vehicle and a motorcycle because those terms are encompassed in "any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road." The provision allows businesses to carry forward interest amounts disallowed under the provision to succeeding tax years indefinitely. Any carryforward of disallowed interest is an item taken into account for certain corporate acquisitions described in Section 381 and is treated as a "pre-change loss" subject to limitation under Section 382. The provision includes special rules to allow a pass-through entity's owners to use an unused interest limitation for the tax year and to ensure that net income from pass-through entities is not double-counted at the partner level. In the context of disallowed business interest, Section 381 also is modified to provide that the acquiring corporation shall take into account, as of the close of the day of distribution or transfer, the carryover of disallowed business interest under Section 163(j)(2) to tax years ending after the date of distribution or transfer. Effective date The provision is effective for tax years beginning after December 31, 2017. Implications The provision generally adheres closely to the Senate bill, but modifies the definition of adjusted gross income to be computed without regard to deductions allowable for depreciation, amortization and depletion, as well as any modifications made by the Secretary. The provision does not include a grandfather rule for existing debt obligations. The provision reduces the advantage of financing merger and acquisition transactions with debt. To the extent the acquirer cannot deduct interest on acquisition debt, the economic cost of a debt-financed acquisition will be greater than under current law. Taxpayers facing deferral or disallowance of interest deductions generally will have incentives to increase their net interest income, either by converting interest into another type of deductible expense or by converting another type of income into effectively tax-free interest income. The treatment of disallowed interest carryovers as pre-change losses significantly broadens the relevance of Section 382. Because any carryforward of disallowed interest is subject to limitation under Section 382, it appears likely that highly leveraged companies will be subject to Section 382 solely as a result of having disallowed interest. Modification to net operating loss deduction and limitation of losses for non-corporate taxpayers Net operating loss deduction The provision allows indefinite carry forward of NOLs arising in tax years ending after December 31, 2017. The provision also repeals all carrybacks for losses generated in tax years ending after December 31, 2017, but provides a special two-year carryback for certain losses incurred in the trade or business of farming. For losses arising in tax years beginning after December 31, 2017, the provision limits the amount of NOLs that a taxpayer could use to offset taxable income to 80% of the taxpayer's taxable income. Net operating losses that are farming losses for any tax year are treated as a separate net operating loss to be taken into account after the remaining portion of the net operating loss for such tax year. As part of the repeal of NOL carrybacks, the provision repeals Section 172(f), the special rule allowing a 10-year carryback of specified liability losses. Non-corporate loss limitation The provision limits excess business losses for non-corporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026. Excess business losses are defined as the excess of the taxpayer's aggregate deductions attributable to trades or businesses of the taxpayer over the excess of aggregate gross income or gain of such taxpayer for the tax year that is attributable to such trades or businesses, plus $250,000 (200% of such amount in the case of a joint return). Disallowed excess business losses will be treated as a net operating loss carryforward to the next year under Section 172. The provision also provides that the farming loss limitation of Section 461(j) will not apply for tax years beginning after December 31, 2017 and before January 1, 2026. For partnerships and S-corporations, the provision will apply at the partner or S-corporation owner level. The provision will apply after the application of Section 469 (the passive loss limitation rules). The provision requires the Treasury Department to prescribe reporting requirements, as necessary, to carry out the purposes of the provision. The provision applies to tax years beginning after December 31, 2017. Effective dates The indefinite NOL carry forward, general repeal of NOL carrybacks (including the repeal of Section 172(f)), and the special NOL carryback rule for certain farming losses are effective for losses arising in tax years ending after December 31, 2017. The 80% NOL limitation rule is effective for losses arising in tax years beginning after December 31, 2017. The loss limitation provision applies to tax years beginning after December 31, 2017. Implications Net operating loss deduction The Act generally follows the Senate bill provision. The Senate Finance Committee's explanation of the Senate bill provision states the following with respect to the purpose of the amendment to Section 172: "The Committee believes that, except in limited circumstances of disaster losses for farms, NOLs should be carried forward, but not back. The Committee also believes that taxpayers should pay some income tax in years in which the taxpayer has taxable income [ ]. Therefore, the Committee believes that the NOL deduction should be limited to a certain percentage of taxable income … " The Act does not include a provision under the House bill that allowed amounts carried forward to be increased by an interest factor in order to preserve the net-present value of the NOLs. The modification of Section 172 related to carryover and carryback changes applies to NOLs arising in tax years ending after December 31, 2017. Therefore, a fiscal-year taxpayer with a tax year ending after December 31, 2017 (a retailer with a January 31, 2018 year end, for example) may not carry back NOLs arising in the February 1, 2017-January 31, 2018 period and may not carry back NOLs arising in that period that are specified liability losses for the 10-year period currently allowed. A calendar-year taxpayer, however, with a tax year ending December 31, 2017, may use the current carryback and specified liability loss provisions for losses arising in the January 1, 2017-December 31, 2017 period. The 80% limitation applies to losses arising in tax years beginning after December 31, 2017. Therefore, carryover losses from tax years beginning before December 31, 2017, are not subject to the 80% limitation. Specified liability losses are limited deductible expenditures for product liability, land reclamation, nuclear power plant decommissioning, dismantlement of drilling platforms, remediation of environmental contamination, and workers' compensation payments. Although the Act preserves a majority of the NOL provisions under the Code, the repeal of Section 172(f) is expected to have the greatest impact on the power and utilities, agriculture, oil and gas, construction, consumer products, and retail industries, which incur the types of liabilities eligible for the extended carryback benefit under Section 172(f). Taxpayers will not be able to rely on specified liability losses as a source of cash tax savings for eligible liabilities that generate losses in tax years ending after December 31, 2017. The Joint Committee on Taxation estimated that this provision will increase tax revenues by $157.8 billion dollars during the 2018-2027 budget period (see JCX-65-17, Dec. 11, 2017). Non-corporate loss limitation The Act follows the Senate bill provision. The Senate Finance Committee's explanation of the Senate bill provision states the following with respect to the purpose of the amendment to Section 461: "The Committee believes that excess business losses of taxpayers other than corporations should be carried forward rather than bunched in the year of loss." The provision temporarily replaces the current farming loss limitation regime under Section 461(j) with a new regime, and limits using non-passive business losses in the year they are incurred. The Joint Committee on Taxation has estimated that the provision will increase tax revenues by $137.4 billion over the 2018-2027 budget period (JCX-65-17, Dec. 11, 2017). Applicable recovery period for real property The provision eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Instead, it provides a general 15-year recovery period (utilizing a straight-line recovery method and half-year convention generally) for qualified improvement property and a 20-year alternative depreciation system recovery period (utilizing a straight-line recovery method and half-year convention generally) for such property. The provision also modifies the recovery period for residential rental property under the alternative depreciation system to 30 years. The provision also requires a real property trade or business that elects out of the limitation on the interest deduction under Section 163(j) to use the alternative depreciation system to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. Effective date The provision is effective for property placed in service after December 31, 2017. Implications The provision streamlines the treatment of certain real property utilized in the retail and consumer product sector by utilizing a qualified improvement property definition and provides taxpayers a benefit by providing qualified improvement property, which is subject to less onerous requirements than the prior definition of qualified leasehold improvement property, with a 15-year recovery period. The modification to the recovery period under the alternative depreciation system for residential rental property, as well as the provision of a 20-year recovery period for qualified improvement property for alternative depreciation system purposes, provide taxpayers in a real property trade or business that elect out of the limitation on the interest deduction under Section 163(j) with the ability to recover real property over shorter recovery periods in certain instances when compared with current law. International tax reform New current-year inclusion to US shareholders for global intangible low-taxed income The Act requires a US shareholder of any CFC to include in gross income for a tax year its "global intangible low-taxed income" (GILTI) in a manner similar to current subpart F income inclusions. A US shareholder's GILTI for any tax year means the excess, if any, of the US shareholder's "net CFC tested income" over its "net deemed tangible income return." In this manner, GILTI represents an amount deemed in excess of a specified return. Net CFC tested income. A US shareholder's net CFC tested income for a tax year equals the excess, if any, of: (i) the shareholder's aggregate pro rata share of the "tested income" of each of its CFCs for the tax year, over (ii) the shareholder's aggregate pro rata share of the "tested loss" of each of its CFCs for the tax year. Tested income of a CFC for a tax year means the excess, if any, of: (i) the CFC's gross income for that year — but not including ECI, subpart F gross income, gross income excluded from "foreign base company income" or "insurance income" under the high-tax exception of Section 954(b)(4), dividends received from related persons within the meaning Section 954(d)(3), and any foreign oil and gas extraction income within the meaning of Section 907(c)(1) (tested gross income) — over (ii) the deductions (including taxes) properly allocable (under rules similar to those of Section 954(b)(5)) to such tested gross income. Tested losses of a CFC are the excess, if any, of: (i) deductions properly allocable to its tested gross income, over (ii) its tested gross income. Accordingly, for any tax year, a CFC could have net tested income or net tested loss, but not both. Net deemed tangible income return. A US shareholder's net deemed tangible income return for a tax year equals the excess, if any, of: (i) 10% of the US shareholder's aggregate pro rata share of the "qualified business asset investment" (QBAI) of its CFCs over (ii) the amount of interest expense taken into account in determining the US shareholder's net CFC tested income to the extent that the interest income attributable to the expense is not taken into account in determining the US shareholder's net CFC tested income (e.g., interest payable to an unrelated lender). A CFC's QBAI for any tax year means the average of its aggregate adjusted bases, measured as of the close of each quarter of the tax year, in tangible property used by the CFC in a trade or business for the production of tested income and for which a deduction is generally allowable under Section 167. The Treasury is authorized to issue anti-avoidance regulations (and other appropriate guidance) with respect to QBAI. Deemed-paid foreign income taxes. The Act amends current Section 960 so that a US corporation with a GILTI inclusion will be treated as having paid foreign income taxes equal to 80% of the product of: (i) its "inclusion percentage" and (ii) the aggregate "tested foreign income taxes" paid or accrued by its CFCs. A US corporation's inclusion percentage for a tax year means the ratio (expressed as a percentage) of: (i) its GILTI inclusion to (ii) the aggregate of its pro rata shares of the tested income of its CFCs. Tested foreign income taxes of a CFC means the foreign income taxes paid or accrued by the CFC that are properly attributable to the tested income of the CFC that is taken into account by the US corporation under Section 951A. Notwithstanding that the US corporation will be treated as having paid only 80% of the product determined above, the Act amends Section 78 generally to treat the US corporation as having received dividends from the relevant CFCs equal in the aggregate to 100% of that product. (The deemed dividends will not, however, be treated as dividends for purposes of calculating dividend received deductions under Section 245 or 245A.) The Act also creates a new foreign tax credit limitation category under Section 904(d) for GILTI that does not constitute passive category income (passive GILTI will continue to be treated as income in the passive limitation category). Excess foreign tax credits in the non-passive GILTI limitation category for a tax year cannot be carried back or forward to another tax year. Effective date The new GILTI provision is effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of US shareholders with or within which such tax years of foreign corporations end. Implications Coupled with the 50% deduction (37.5% deduction starting in 2026) allowable to a US corporation against its GILTI inclusion described next, the Act's GILTI provision effectively establishes a global minimum tax on foreign earnings of a CFC. For tax years beginning after December 31, 2017 and before January 1, 2026, the highest effective tax rate on GILTI is 10.5%. For tax years beginning after December 31, 2025, the highest effective tax rate on GILTI is 13.125%. Because intangible property is not taken into account to calculate QBAI, this provision is particularly significant for US taxpayers with considerable offshore intangible property or with high-margin service companies in their supply chains that do not have significant QBAI, such as procurement hubs or principal companies in low-taxed jurisdictions. Further, the Act expands the definition of US shareholder. Thus, for example, the provisions affect foreign-parented groups with a US subsidiary that partially owns a foreign subsidiary (which constitutes a CFC). Deduction allowable for foreign-derived intangible income and GILTI inclusions The Act allows a US corporation a new deduction against its "foreign-derived intangible income" (FDII) and GILTI inclusion (including any corresponding Section 78 dividends). For tax years of the US corporation beginning after December 31, 2017, but on or before December 31, 2025, the deduction generally equals the sum of: (i) 37.5% of the US corporation's FDII and (ii) 50% of the sum of: (a) its GILTI inclusion, and (b) corresponding Section 78 dividends. If, however, the sum of the US corporation's FDII, GILTI, and Section 78 dividends exceeded its taxable income (determined without regard to the new deduction), the amount of FDII (on the one hand) and GILTI and Section 78 dividends (on the other) will be reduced proportionately to eliminate the excess. For tax years beginning after December 31, 2025, these percentages are reduced to 21.875% and 37.5%, respectively. Foreign-derived intangible income. A US corporation's FDII for a tax year is the amount that bears the same ratio to its "deemed intangible income" as its "foreign-derived deduction eligible income" bears to its "deduction eligible income." Deduction eligible income. A US corporation's deduction eligible income for any tax year means the excess, if any, of: (i) its gross income, without regard to any amount included in gross income under Section 951(a)(1), its GILTI inclusion, any financial services income (as defined under Section 904(d)(2)(D)), any dividend received from a CFC for which it is a US shareholder, any domestic oil and gas extraction income, and any foreign branch income (as defined under new Section 904(d)(2)(J)), over (ii) the deductions, including taxes, properly allocable to such gross income. Foreign-derived deduction eligible income. A US corporation's foreign-derived deduction eligible income for a tax year means any deduction eligible income that the corporation derived in that year in connection with: (i) property sold (for these purposes, including a lease, license, exchange, or other disposition) to any non-US person that the US corporation "establishes to the satisfaction of the [Treasury] Secretary" (establishes) is for a "foreign use"; or (ii) services that the US corporation establishes that it provided to a person or, with respect to property, located outside of the United States. Foreign use means any use, consumption or disposition that is not within the United States. Special rules apply to property sold or services provided to: (i) an unrelated intermediary within the US and (ii) a related party (generally defined as greater than 50% common ownership). Deemed intangible income. A US corporation's deemed intangible income for a tax year is the excess, if any, of its deduction eligible income over its "deemed tangible income return" for the year. A US corporation's deemed tangible income return for a tax year is 10% of the corporation's QBAI for the year. QBAI is determined with reference to tangible property (or portion thereof) that a US corporation used in a trade or business for the production of deduction eligible income and for which a deduction is generally allowable under Section 167. A US corporation's QBAI for a tax year is the average of the aggregate-adjusted bases in such property, measured as of the close of each quarter of the year. Effective date The new deduction is allowable for tax years beginning after December 31, 2017. Implications Coupled with the provision that reduces the tax rate imposed on US corporations to 21%, the Act generally subjects a US corporation's foreign-derived intangible income to an effective tax rate of 13.125% (16.406% starting in 2026). The deduction incentivizes US corporations to sell products to a non-US person, or to provide services to a person outside the United States. It is also beneficial for US corporations licensing intellectual property to non-US persons. Note that if the "sale" of goods, services or IP is to a related foreign person, it must be for foreign use — i.e., this precludes round-tripping. New base erosion and anti-abuse tax (BEAT) The Act introduces a base erosion minimum tax (generally referred to as a BEAT). In general, the BEAT applies to an applicable taxpayer (i.e., corporations, other than RICs, REITs, or S-corporations) that is subject to US net income tax with average annual gross receipts of at least $500 million for the three-year period ending with the preceding tax year, and that has made certain related party deductible payments, determined by reference to a base erosion percentage of at least 3% (2% in the case of banks and certain security dealers) of the corporation's total deductions for the year. An applicable taxpayer must pay a base erosion minimum tax amount equal to the excess of 10% (a 5% rate applies for tax years beginning in calendar year 2018) of its modified taxable income for a tax year over its regular tax liability for the tax year reduced, but not below zero, by the excess, if any, of credits allowed under Chapter 1 against the regular tax liability over the sum of: (1) the credit allowed under Section 38 (general business credit) for the tax year properly allocable to the research credit (Section 41(a)), plus (2) the portion of the applicable Section 38 credits not in excess of 80% of the lesser of the amount of such credits or the base erosion minimum tax amount (determined without regard to this clause (2)). "Applicable Section 38 credits" means credits properly allocable to: (1) the low-income housing credit (Section 42(a)), (2) the renewable electricity production credit (Section 45(a)), and (3) the investment credit (Section 46), but only to the extent properly allocable to the energy credit determined under Section 48. For tax years beginning after December 31, 2025, the 10% rate increases to 12.5%, and the regular tax liability is reduced by the aggregate amount of Chapter 1 credits. In the case of a taxpayer that is a member of an affiliated group that includes a bank (Section 581) or a registered securities dealer (Section 15(a) of the Securities Exchange Act of 1934), the rates are one percentage point higher than these rates. An applicable taxpayer's modified taxable income equals its taxable income determined under Chapter 1 without regard to a deduction or reduction, as applicable, (a base erosion tax benefit) allowable for the tax year with respect to any base erosion payment, and without regard to any "base erosion percentage" of any NOL deduction allowed under Section 172. Base erosion tax benefits attributable to base erosion payments that are taxed under Sections 871 or 881, in proportion to the actual rate of tax imposed under those sections to 30%, are excluded from the computation of modified taxable income. A "base erosion payment" generally means: (i) any amount paid or accrued by the corporation to a foreign related party and with respect to which a deduction is allowable, including amounts paid or accrued to acquire depreciable or amortizable property, (ii) any premium or other consideration paid or accrued by the taxpayer to a foreign person that is a related party of the taxpayer for any reinsurance payments taken into account under Sections 803(a)(1)(B) or 832(b)(4)(A), and (iii) any amount that constitutes reductions in gross receipts of the taxpayer that is paid to or accrued by the taxpayer with respect to: (1) a surrogate foreign corporation (as defined in Section 7874(a)(2)) that is a related party of the taxpayer (but only if such person first became a surrogate foreign corporation after November 9, 2017), and (2) a foreign person that is a member of the same expanded affiliated group as the surrogate foreign corporation. Base erosion payments do not include: (i) any amount that constitutes reductions in gross receipts, including payments for costs of goods sold (except as noted previously for surrogate foreign corporations), (ii) any amount paid or accrued by a taxpayer for services if such services meet the requirements for eligibility for use of the services cost method described in Treas. Reg. Section 1.482-9, without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure and only if the payments are made for services that have no markup component, and (iii) any qualified derivative payment, if certain requirements are met. A "base erosion tax benefit" means: (i) any deduction allowed under Chapter 1 for the tax year with respect to a base erosion payment, (ii) in the case of a base erosion payment with respect to the purchase of property of a character subject to the allowance for depreciation or amortization, any deduction allowed in Chapter 1 for depreciation or amortization with respect to the property acquired with such payment, (iii) any reduction under Section 803(a)(1)(B) in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity insurance, and any deduction under Section 832(b)(4)(A) from the amount of gross premiums written on insurance contracts during the tax year for premiums paid for reinsurance, or (iv) any reduction in gross receipts with respect to a payment described previously with respect to a surrogate foreign corporation in computing gross income of the taxpayer for the tax year. The "base erosion percentage" for any tax year is the aggregate amount of base erosion tax benefits for the year divided by the aggregate deductions allowable under Chapter 1 for the year, including base erosion payments, though the denominator excludes deductions allowed under Sections 172, 245A or 250, and deductions for qualified derivative payments and payments for certain services outside the scope of a base erosion payment (as described previously). For purposes of the provision, all persons treated as a single employer under Section 52(a) are treated as one person. However, the exception for foreign corporations under Section 1563(b)(2)(C) is disregarded in applying Section 1563 within Section 52 for these purposes. In the case of a foreign person, the gross receipts that are taken into account for purposes of the provision are those taken into account in determining income of that foreign person that is effectively connected with the conduct of a US trade or business. Related party for purposes of this provision means: (i) any 25% owner of the taxpayer, (ii) any person who is related to the taxpayer or any 25% owner of the taxpayer, within the meaning of Sections 267(b) or 707(b)(1), and (iii) any other person related to the taxpayer within the meaning of Section 482. Section 318 regarding constructive ownership of stock applies to the definition of related party with the exception that "10%" is substituted for "50%" in Section 318(a)(2)(C), and, for these purposes, Section 318(a)(3)(A), (B) and (C) do not cause a US person to own stock owned by a person who is not a US person. The Act grants the Treasury Department broad authority to prescribe such regulations or other guidance necessary or appropriate, including regulations providing for such adjustments to the application of this section necessary to prevent avoidance of the provision, including through: (1) the use of unrelated persons, conduit transactions, or other intermediaries, or (2) transactions or arrangements designed in whole or in part: (A) to characterize payments otherwise subject to this provision as payments not subject to this provision, or (B) to substitute payments not subject to this provision for payments otherwise subject to this provision. The provision adds new information reporting requirements under Sections 6038A and 6038C to require the reporting of information relating to payments subject to the provision. Further, the provision also increases the failure to furnish information or maintain records penalties under Section 6038A(d)(1) and (2) to $25,000. Effective date The BEAT applies to base erosion payments paid or accrued in tax years beginning after December 31, 2017. Implications The minimum base erosion tax is imposed on certain domestic corporations and the ECI of foreign corporations engaged in a US trade or business, irrespective of whether the ultimate parent entity is a US or foreign person. This is particularly relevant to CP&R companies with foreign procurement hubs that source for the United States. The carve-out for cost of goods sold encourages buy-sell structures vs commission or services models. However, before considering switching to a buy-sell model, the BEAT impact should be assessed to see if the base erosion payments are of sufficient magnitude to trigger the BEAT and/ or whether the services payments might properly be included in COGS. Services payments to foreign companies should also be evaluated to determine whether they qualify as SCM services. Section 367(a)(5) active trade or business exception repealed The Act includes a provision in which transfers of property used in an active trade or business will no longer qualify as a non-recognition transfer. This provision is effective for transfers after December 31, 2017. Implications The repeal of the active trade or business exception under Section 367(a) is likely to have a significant impact on domestic US corporations that decide to incorporate a foreign branch or transfer assets out to a foreign corporation in a non-recognition transfer. US retail and consumer products companies will need to assess immediately if future transactions that involve outbound transfers will be caught under Section 367. ———————————————
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