By: Diane Ring
Since December 2017, tax conferences in the United States have focused substantially on the H.R. 1 tax reform legislation. No surprise there — the 2017 changes are among the most significant in the past thirty years. But over the past five months, through attending numerous tax conferences featuring international tax practitioners, I’ve observed some interesting developments in the nature of the discussions and debates at these conferences. These changes are pretty revealing about the process of absorbing the true impact of the new tax law, particularly in international tax. This weekend’s ABA May Tax Section Meeting in Washington, D.C. highlighted some of these trends.
Practitioners and taxpayers have moved into a deep analytical mode. They are no longer just trying to absorb the basics of the new rules; instead, they are now carefully identifying and articulating complicated but absolutely fundamental questions about the application of the regimes. It is beyond the scope of this post to explore those issues that occupied hours upon hours of debate over the weekend, but three brief examples provide a sense of their complexity.
Interplay among Rules. One big theme was the need for the government to clarify the interplay among rules, that is, the order in which various rules will be applied. So, for example, to the extent taxable income is a relevant component of different rules’ own internal workings—how will taxable income be calculated? Thus, in determining the taxable income limit in section 250(a)(2) which governs the availability of the section 250(a)(1) deduction (generally, a deduction of specified percentages of foreign derived intangible income and global intangible low-taxed income ), how will income be calculated? Will it follow the inclusions under subpart F, new section 951A (GILTI), section 78, and new section 250(b) (FDII) ? How does revised section 163(j) fit into the picture with section 250, and what income-related calculations are made prior to the application of the new section 163(j) limits?
GILTI-CFC Interactions. A second big theme was the way in which layering the new GILTI (Global Intangible Low-Taxed Income) regime on top of the existing subpart F regime creates serious challenges given that both regimes operate somewhat differently. For example, the GILTI regime operates on an aggregate basis for the US shareholder, while the subpart F regime operates on a separate CFC basis. This calls into question whether conforming the GILTI analysis and calculations closely to the operation of subpart F makes sense, for example in the treatment of consolidated groups with multiple CFCs and GILTI income.
Foreign Tax Credits. Finally, foreign tax credits have attracted serious scrutiny, despite the advertised “territorial” direction of international tax reform. The new law creates a GILTI foreign tax credit basket that has no carryovers and also creates the potential for future withholding taxes on undistributed section 965 income. The scenarios created by these features (and others) raise important foreign tax credit issues for multinationals and this warrants significant attention from both taxpayers and governments in the new “territorial” world.
The sheer quantity of reasonably important international tax issues on which the IRS and Treasury will need to provide guidance is daunting. (This is in addition to the amount of guidance they must be preparing outside of international). On the taxpayer side, international tax reform demands a mastery of the new regimes not only for purposes of basic tax compliance, but also for purposes of reassessing how to plan, structure, and restructure cross-border business on a global level.
A Renewed Emphasis on Modeling. One of the most interesting insights that emerged over the weekend was the fact that sophisticated international tax advisors are now living in world in which their well-honed intuitions about international tax law, tax planning, and tax advice are no longer reliable. In fact, more than one panelist described the new international tax world as one that is upside down at times, where the very last thing you would have advised your client to do may in fact be best strategy going forward. The most common response to the risk and uncertainty in this new world is to model everything. Certainly, multinationals and their tax advisors were engaged in modeling in the past, but at recent conferences, the emphasis that panelists are placing on modeling exceeds anything I have observed in years prior. This makes sense; when you cannot rely on intuition you need to be very careful about mapping out all elements of a structure or transaction, and its alternatives. Of course, transactions can be difficult to model where numerous ambiguities or flat-out uncertainties about the rules’ application remain.
A Role for Tax Insurance? Taxpayers pursue a variety of strategies in their efforts to reduce tax risk (an interesting new paper by Heather Field—Tax Lawyers As Tax Insurance, forthcoming in William & Mary Law Review—examines the different options for tax insurance). Prior to this weekend, I had wondered whether international tax advisors and taxpayers might pursue tax insurance as a way to manage the increased level of post-tax reform risk and uncertainty. An interesting presentation on tax insurance at the ABA Tax Section meeting suggests otherwise. Despite what appears to be a reasonably broad market in tax insurance, the business model relies on the coverage provider being able to get comfortable with the accuracy of the insured’s intended tax position. To the extent there is serious uncertainty about particular areas of international tax law right now, determining the recommended tax treatment could essentially be close to a coin toss. As the insurers explained, such a risk scenario would be outside the scope of tax insurance products. So taxpayers will need to proceed on their own, working with IRS and Treasury to secure needed guidance. Perhaps one silver lining: tax lawyers just entering the international tax field might be able to build their expertise in the new regimes just as more established advisors are doing so.