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Report on recent US international tax developments – 16 February 2018

The United States (US) Government provided more repatriation transition tax guidance on 13 February with the release of Rev. Proc. 2018-17, announcing modifications to the procedures for changing the accounting period of certain Internal Revenue Code1 Section 965 specified foreign corporations owned by US shareholders. According to the Internal Revenue Service (IRS), Rev. Proc. 2018-17 serves to prevent taxpayers from changing the annual accounting periods of certain foreign corporations in 2017 under either the existing automatic or general procedures, if the change could result in the avoidance, reduction, or delay of the transition tax. Rev. Proc. 2018-17 applies to any request to change an annual accounting period that ends on 31 December 2017, regardless of when the request was filed.

US officials this week also continued to offer insight into future guidance related to the enactment of the Tax Cuts and Jobs Act (TCJA). In keeping with earlier statements, a senior Treasury official was quoted as saying proposed regulations covering many areas of the TCJA will be out by the end of the year, with the plan to have final rules issued by June 2019, retroactive to the effective date of the TCJA. Taxpayers would have the option to rely on the proposed regulations.

In the international area, the Treasury official also disclosed there will be two more Section 965 transition notices this year, with the first one expected to be issued in March. (The Government issued transition guidance in the form of Notice 2018-7 and Notice 2018-13 in December and January, respectively.) According to an IRS official, the next transition notice will focus on timing and procedural issues, including elections and estimated tax payments. More specifically, the IRS official let on that the notice would address how companies elect installment payments and who makes the election if a shareholder is a domestic partnership. The official was quoted as saying the Government is inclined to allow the US partners to make the election. The third transition notice reportedly will also address the way in which corporations handle their estimated tax payments for 2018.

Another official said Treasury and the IRS Office of Chief Counsel have set up groups to address various TCJA international areas, including the global intangible low-taxed income and foreign-derived intangible income (FDII) provisions, the base erosion and anti-abuse tax, and the hybrid rules. Treasury reportedly is also in the process of identifying short, medium, and long-term regulatory priorities.

Regarding the FDII provision, the Treasury official said the Trump Administration plans to defend the measure at the next Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices meeting in April. A number of European governments have indicated concern that the FDII and certain other TJCA international provisions may be discriminatory. A White House official also weighed in on the subject this week. Addressing the claim that the FDII provision may be an export incentive in violation of World Trade Organization (WTO) rules, National Economic Council Director Gary Cohn said the measure should be viewed in the context of the entire set of new international tax rules, rather than focusing on the individual provision. “We are very confident that they abide by all the [WTO] rules and all the regulations and all the laws when you look at them in their entirety,” he said.

An IRS official this week said the Service is taking a leadership role in the OECD’s International Compliance Assurance Program (ICAP). The OECD launched an ICAP pilot in January involving eight major jurisdictions including the US. It will focus on multilateral risk assessment and resulting tax assurance of large Multinational Enterprise (MNE) groups. ICAP will use Country-by-Country (CbC) reports and other taxpayer-provided information to allow MNE groups and tax administrations to engage in an open and transparent discussion on tax risks, and, if agreement can be reached that the issues are low risk, to provide outcome letters that state this. The IRS official said the ICAP program is an example of how the IRS is attempting to be “proactive with regard to CbC reporting.”

The official said, “The hope with the pilot program is that participants will be able to identify certain flows that can be removed from the audit process, so it really is a dispute prevention effort from the start.”

The OECD released more Base Erosion and Profit Shifting (BEPS) Action 13 CbC reporting (CbCR) guidance on 8 February. Existing guidance on the implementation of CbCR (the Guidance was updated to address two specific issues: (i) the definition of total consolidated group revenue, relevant to determine whether a filing obligation exists; and (ii) whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes a Systemic Failure, which could trigger an obligation for local filing of the CbC report. The OECD also released a compilation of the approaches adopted by 24 member jurisdictions of the Inclusive Framework on BEPS with respect to some of the issues where the Guidance allows for alternative approaches.

Endnote

1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

EYG no. 00928-181Gbl

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