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Spotlight

The IRS issued several significant international tax notices this week, including a third repatriation transition notice following the enactment of the provision in the Tax Cuts and Jobs Act (TCJA) last December.

Notice 2018-26 announced the Government's intention to issue new regulations under Section 965 on determining the amount of gross income recognized by US shareholders as an inclusion of deferred foreign income (transition tax). This is the third notice issued by the IRS on Section 965. The described regulations cover a variety of issues, including the anti-avoidance provisions, rules on the application of Section 965 to various taxpayers, guidance on elections made under Section 965, guidance on the definition of net accounts receivable, planned regulations on Section 962 elections, and penalty relief under Sections 6654 and 6655 from the underpayment of estimated tax in certain instances.

The anti-abuse rules will apply to certain transactions, accounting method changes, and entity classification elections that occurred (or were made) on or after November 2, 2017. Notice 2018-26 also includes relief from certain estimated tax requirements and penalties resulting from the transition tax and TCJA changes to stock attribution rules.

The regulations and instructions described in the Notice are effective for a specified foreign corporation's (SFC's) inclusion year and its US shareholders' tax years in which or with which the SFC's inclusion year ends. Taxpayers may rely on the rules described in the Notice until such regulations and instructions are issued.

The Service also issued Notice 2018-28, offering up much needed details on forthcoming proposed regulations on the Section 163(j) business interest expense limitation. Section 163(j), amended by the TCJA, limits the deduction for business interest expense for tax years beginning after December 31, 2017. Specifically, for any taxpayer subject to the provisions, Section 163(j)(1) generally limits the amount of business interest expense that may be deducted in a tax year to the sum of: (1) the taxpayer's defined business interest income, (2) 30% of the taxpayer's adjusted taxable income (ATI), and (3) the taxpayer's defined floor plan financing interest.

The Notice describes several issues regarding the application of Section 163(j) that will be clarified in future proposed regulations. The focus of considerable speculation, the Notice indicates that regulations will clarify that the limitation in Section 163(j)(1) on the amount allowed as a business interest deduction applies at the level of the consolidated group. Importantly, the Notice clarifies that prior to the issuance of proposed regulations, taxpayers may rely on the rules described in Sections 3 through 7 of the Notice. The IRS further issued Notice 2018-29, providing interim guidance under new Section 1446(f) for dispositions by non-US persons of interests in non-publicly traded partnerships (non-PTPs) that own assets generating — or capable of generating — income that is effectively connected with the conduct of a US trade or business.

The TCJA added new Section 864(c)(8), which treats the portion of gain (or loss) from the sale or exchange of an interest in a partnership that is engaged in a US trade or business as effectively connected income (ECI), to the extent the gain (or loss) from a hypothetical sale or exchange of the underlying assets held by the partnership would be treated as ECI allocable to such partner. This provision confirms the IRS's position under Revenue Ruling 91-32, and prospectively overrules Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner. New Section 864(c)(8) applies to sales, exchanges and dispositions on or after November 27, 2017. Foreign sellers of partnership interests must file US income tax returns to pay the tax.

The TCJA also added new Section 1446(f), which requires the transferee of a partnership interest to withhold 10% of the amount realized on the sale or exchange of the partnership interest unless the transferor partner provides an affidavit that it is not a foreign person and provides a US taxpayer identification number (TIN). Under the statute, the amount required to be withheld could be reduced if the IRS agrees in advance to a reduced amount that "will not jeopardize the collection of tax."

Under Notice 2018-29, withholding will be required for all such sales after December 31, 2017, including sales completed before the date of the Notice. Tax withheld on such sales must be paid to the IRS and reported on IRS Forms 8288 and 8288A. Going forward, tax must be paid and the forms filed within 20 days of the date of sale. However, tax payments and forms filed by May 31, will be deemed to be timely paid and filed regardless of the 20-day requirement.

The Notice does not provide a procedure to obtain a certificate from the IRS to reduce or eliminate withholding. However, interim self-certifications are provided for certain situations where withholding might be in excess of the transferee's ultimate tax liability. The Notice indicates that a partnership must perform Section 1446(f) withholding on distributions to non-US partners in excess of the partner's basis in the partnership. It also requests comments on several specific issues that the IRS continues to consider.

Finally, in Notice 2018-31, the Service issued guidance on changes to the US Country-by-Country (CbC) reporting requirement under Reg. Section 1.6038-4 for certain US multinationals that are considered specified national security contractors. Although final regulations requiring CbC reporting that were issued in June 2016 did not provide an exception for information related to US national security, the preamble stated the US Government would continue to consider the national security implications of CbC reports.

Notice 2018-31 announced that Reg. Section 1.6038-4 will be amended to provide the definition of a specified national security contractor and changes on how to report on Form 8975, "Country-by-Country Report," for those multinational groups that have a reporting requirement. Amendments to the regulations described in Notice 2018-31 apply to CbC reports and amended CbC reports filed after March 30.

The IRS Advance Pricing and Mutual Agreement (APMA) program issued its 19th annual Advance Pricing Agreement (APA) report on March 30, in Announcement 2018-08. The report provides an updated discussion of the APA program, including its activities and structure for calendar year 2017. The report shows that interest in APAs remains strong, with taxpayers filing 101 APA requests in 2017 compared to 98 in 2016. The total number of APAs concluded increased from 86 to 116 and the median amount of time to finalize an APA slightly increased from 32.8 months to 33.8 months. See EY Tax Alert 2018-0731 for details.

The tax press is reporting that the Organisation for Economic Co-operation and Development (OECD) on April 4 began its review of US tax reform, at the behest of the European Union (EU). The report quoted Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, as saying the review "may be completed in 2018, depending on a [Forum on Harmful Tax Practices] FHTP meeting next October and whether additional information is necessary (e.g., regulations related to the regime) that may require further analysis." The OECD will at least be reviewing the new US base erosion and anti-abuse tax, the deduction for foreign-derived intangible income, and the global intangible low-taxed income provision.

The OECD this week also released the second edition of the Common Reporting Standard Implementation Handbook. The Handbook offers practical guidance to assist government officials and financial institutions in the implementation of the common reporting standard (CRS) as well as a practical overview of the CRS for both the financial sector and the general public.