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Report on recent US international tax developments – 2 November 2018

The Internal Revenue Service (IRS) on 31 October 2018 issued proposed regulations reducing the amount determined under Internal Revenue Code1 Section 956 for certain domestic corporations that own (or are treated as owning) stock in controlled foreign corporations (CFCs). The proposed regulations would reduce a corporate United States (US) shareholder’s Section 956 inclusion with respect to a CFC by the amount for which the US shareholder would have been allowed a Section 245A dividend received deduction (DRD) if it had received a distribution from the CFC equal to the amount otherwise determined under Section 956. In other words, the tentative Section 956 inclusion is reduced by the amount of the hypothetical Section 245A eligible dividend that the US shareholder could have otherwise received from the CFC. The preamble notes that this is to maintain symmetry between the taxation of actual repatriations and the taxation of deemed repatriations.

The proposed rules address Treasury’s concern with Section 956 being retained post-Tax Cuts and Jobs Act (TCJA) and the ability of taxpayers to affirmatively trigger Section 956 inclusions in order to access foreign taxes. The proposed regulations would limit taxpayers’ ability to take that course of action by reducing (or eliminating) the Section 956 inclusion itself. Special rules are also provided to address indirect ownership.

The proposed regulations would apply prospectively for taxable years of CFCs beginning on or after the date final regulations are published. The preamble allows taxpayers to rely on the proposed regulations currently, however, but only if done so for all CFCs.

Also on the TCJA radar, the IRS recently issued draft Form 8990, Limitation on Business Interest Expense Under Section 163(j) and draft instructions for Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts. Form 8991 relates to new Section 59A, Base Erosion and Anti-abuse Tax. Note that early release IRS draft instructions and forms often incorporate changes before being officially released.

The IRS Large Business and International division (LB&I) this week announced five additional issue-based compliance campaigns, three of which are in the international corporate area. The new campaigns will target offshore service providers, FATCA2 filing accuracy, and Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, delinquent returns. The offshore service providers campaign is aimed at US taxpayers that engaged offshore service providers that “facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets,” generally for tax avoidance or evasion.

US House Ways and Means Committee Chairman Kevin Brady this week issued a statement on the United Kingdom (UK) Budget’s recently announced 2% Digital Services Tax proposal. The Chairman wrote that the UK proposal is similar to the European Union’s digital tax proposal, and that it singles out a key global industry dominated by US companies for a “blatant revenue grab.” He warned that this or other similar unilateral actions will prompt a “review of our U.S. tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets.”

The Dutch Government this week announced its intent to repeal a Decree relating to the application of the Netherlands-US tax treaty to hybrid entities (CV/BV Decree) by 2020. Under the CV/BV Decree, treaty benefits (e.g., lowered or exempt dividend withholding tax rates) may be granted if the investors in a (reverse) hybrid entity are tax treaty eligible. Upon repeal of the CV/BV Decree as of 1 January 2020, dividend distributions from Dutch entities to certain LPs and CVs may become subject to the 15% Dutch dividend withholding tax, unless restructuring takes place before that time. The CV/BV Decree’s repeal is in parallel to Dutch hybrid mismatch rules that should be effective in the Netherlands as of 1 January 2020, with reverse hybrid mismatch rules expected to be implemented as of 2022.


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

2. Foreign Account Tax Compliance Act.


EYG no. 011496-18Gbl

Download this Tax Alert as a PDF file.


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