US TAX UPDATES IMPLICATIONS FOR MULTINATIONAL … · 2020. 11. 10. · Goods/PP $1200 Inventory...
Transcript of US TAX UPDATES IMPLICATIONS FOR MULTINATIONAL … · 2020. 11. 10. · Goods/PP $1200 Inventory...
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US TAX UPDATES – IMPLICATIONS FOR MULTINATIONAL CORPORATIONS
HIGHLIGHTS AND ANALYSIS
Ravi YadavarCFO
Zydus USA
Pooja PahadeAVP – Taxation
Startek Inc.
Shishir LaguPartner - US Tax
KNAV
Kavit SanghviSenior Manager- US Tax
KNAV
Ameya ManmadkarAssociate - US Tax
KNAV
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CONTENTS
▪ Introduction
▪ GILTI High Tax Exception
▪ IRC Section 163(j) - Final Regulations
▪ IRC Section 263A Capitalization Rules
▪ Other Updates
▪ IRS Audit Experience – International Transactions
▪ Updates On The CARES Act
▪ Q&A
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INTRODUCTION
The first half of 2020 was full of various reliefmeasures such as the CARES Act, intending to upliftthe US economy in response to the economic crisisstemming from the coronavirus pandemic.
The second half of 2020 has also brought aboutsome important US tax updates especially from theperspective of multinational corporations carryingout their business in multiple foreign jurisdictions.We shall cover such updates as a part of thiswebinar.
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GILTI HIGH TAX EXCEPTION (HTE)
Observations
In multiple instances, US corporations were losing out on their US domestic losses on account of positive GILTI inclusions (i.e., CFCs with net profits). These corporations did not have any US tax liability due to the availability of foreign tax credit (FTC). Exclusion of certain CFCs with positive GILTI inclusions might assist the US corporations in preserving their US domestic losses.
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Existing Provisions Tax Update
Post the Tax Cuts and Jobs Act (TCJA), a US corporation owning a Controlled Foreign Corporation (CFC) was required to include the income (computed based on the GILTI provisions) of such CFC in its taxable income on its annual US tax return.
The final GILTI HTE regulations permit the exclusionof certain CFCs from the GILTI calculation of a US corporation upon satisfaction of certain requirements.
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GILTI HIGH TAX EXCEPTION (HTE)
Key Provisions:
▪ A CFC is eligible for the GILTI HTE if its Effective Tax Rate (ETR) is above 18.9% which is 90% of the US corporate tax rate of 21%.
▪ ETR = (Tax paid in the foreign jurisdiction) / (Taxable income of CFC as per US tax principles).
▪ Election to be made on an annual basis.
▪ Retrospective Election – Possibility of amending the 2018 and 2019 tax returns.
▪ The election is to be made on the CFC group level.
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GILTI HIGH TAX EXCEPTION (HTE)
Illustration depicting potential benefit
Key Observations:
▪ US domestic losses of $50,000 have been preserved.
▪ Potential cash benefit - $50,000 X 21% = $10,500.
▪ These losses can be carried back too.
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Particulars 2019
US Domestic Loss $100,000
UK GILTI Inclusion $50,000
UK ETR 17%
India GILTI Inclusion $200,000
India ETR 25%
Facts
Pre-HTE Post-HTE
Particulars 2019 2019
US Domestic Loss ($100,000) ($100,000)
GILTI Inclusion $250,000 $50,000
US Taxable Income (A) $150,000 ($50,000)
Tax Rate (B) 21% 21%
Tax Payable (A) * (B) $31,500 NIL
Foreign Tax Credit ($31,500) NIL
Tax Outflow NIL NIL
Tax Calculation
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IRC SECTION 163(J) – FINAL REGULATIONS
Observations
Allowance of COGS depreciation in computing the ATI will increase the value of ATI. This will permit taxpayerswith capital intensive businesses such as manufactures to claim a higher interest expense deduction.
The exclusion of debt issuance cost from the definition of interest expense will lead to such cost beingexcluded from the purview of the IRC section 163(j) limitation. Hence, this expense can be claimed as adeduction without any restriction.
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Existing Provisions Tax Update
1) Only Non - Cost of Goods Sold (COGS) depreciation is allowed as an addback for computing Adjusted Taxable Income (ATI).
2) Debt issuance cost is a part of interest expense
1) Cost of Goods Sold (COGS) depreciation is allowed as an addback for computing Adjusted Taxable Income (ATI).
2) Debt issuance cost is not a part of interest expense
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IRC SECTION 163(J) – FINAL REGULATIONS
Key Provisions:
▪ The CARES Act increase the ATI limit from 30% to 50%. The final regulations confirm this.
▪ Calculations for CFCs can be made on a CFC group level if the CFC group election is made.
▪ Anti-abuse rules relating to expenses economically equivalent to interest expenses.
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IRC SECTION 163(J) – FINAL REGULATIONS
Illustration depicting potential benefit
Key Observations:
▪ The total allowable deductions post final regulations have increased by $45,000 [($100,000 + $50,000) –($105,000)]
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Particulars 2019
US Taxable Income $100,000
Depreciation (Non COGS) $100,000
Depreciation (COGS) $100,000
Interest Expense $100,000
Debt Issuance Cost $50,000
Pre-Final Post-Final
Particulars 2019 2019
US Taxable Income $100,000 $100,000
Depreciation $100,000 $200,000
Interest Expense $150,000 $100,000
Adjusted Taxable Income $350,000 $400,000
ATI Limit ( 30% / 50% ) $105,000 $200,000
Interest Expense (CY) $150,000 $100,000
Allowable Interest Expense Deduction (including debt issuance cost)
$105,000 $150,000
Amount Disallowed $45,000 NIL
Facts
Tax Calculation
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IRC SECTION 263A CAPITALIZATION RULES
Observations
The MSPM method utilizes a separate pre-production and production absorption ratio for calculating the costrequired to be capitalized under IRC section 263A. This will generally result in reduced IRC section 263Acapitalization and will correspondingly increase the allowable deductions for taxpayers (especially taxpayersinvolved in manufacturing).
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Existing Provisions Tax Update
The 263A calculations were required to be done as per the Simplified Production Method (SPM)
The 263A calculations are required to be done as per the Simplified Production Method (SPM) or Modified Simplified Production Method (MSPM)
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IRC SECTION 263A CAPITALIZATION RULES
Key Provisions:
▪ Calculation of capitalized value under MSPM -
Pre-production (PP) cost capitalized = [PP additional 263A cost/PP 471 cost] X PP 471 cost in ending inventory
Production (PR) cost capitalized = [(PR additional 263A cost + PP 263A cost not capitalized) / (PR 471 cost +
Direct material adjustment) ] X PR 471 cost in ending inventory
▪ The documentation requirement upon using the SPM has been made more stringent.
▪ Specific guidance pertaining to permissible negative adjustments has been provided. Negative adjustmentsare only permitted under MSPM, SPM (average annual gross receipts for previous 3 years
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IRC SECTION 263A CAPITALIZATION RULES
Illustration depicting potential benefit
Key Observations:
▪ The total capitalized value under SPM is $82.50.
▪ The total capitalized value under MSPM is $50 ($30 + $20).
▪ Hence, the taxpayer can reduce the capitalization and in turn claim an excess deduction of $32.50 with the use of MSPM.
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Particulars 2019
263A Cost – PP (A) $20
263A Cost – PR (B) $90
471 Cost – PP (C) $1200
471 Cost – PR (D) $800
Inventory – RM & Resale Goods/PP
$1200
Inventory – FG&WIP/PR $300
Facts
Particulars 2019
Inventory Value $1500
SPM Absorption Rate 5.5%
263A Capitalised Value $82.50
SPM Calculation
Particulars 2019
COGS Negative Adjustment (E) $10
SPM Absorption Rate [(A)+(B)]/[(C)+(D)] 5.5%
MSPM Absorption Rate – PP (A)/(C) 1.67%
MSPM Absorption Rate – PR [(B)-(E)]/(D) 10%
Particulars 2019
Inventory Value – PP $1200
MSPM Absorption Rate – PP 1.67%
263A Capitalised Value – PP $20
Inventory Value – PR $300
MSPM Absorption Rate – PR 10%
263A Capitalised Value – PR $30
MSPM Calculation
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OTHER UPDATES
Foreign Tax Credit – Final Regulations and 2020 Proposed Regulations ▪ Allocation and apportionment of foreign taxes and other deductions to gross income in accordance with IRC
section 861. ▪ Disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a
dividends-received deduction.▪ Timing of claiming foreign income tax as a credit.
II) Foreign Derived Intangible Income – Final Regulations▪ Increase in the flexibility of the documentation rules.▪ Notable Revisions to the ordering rules for deduction for FDII and GILTI▪ Notable revisions to computation of FDII such as expense allocation, foreign branch income for FDII
purposes▪ Changes in the foreign sales of general property and foreign sales of intangible property definitions▪ Modifications in manufacturing exceptions▪ More clarity on the related party transactionsIII) Meals and Entertainment▪ Clarifications regarding entertainment expenses and related disallowance.▪ Clarifications regarding the definition of the term “food and beverage expenses”.
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UPDATES ON THE CARES ACT
Some other measures that were enacted as a part of the CARES Act include deferral of social security tax payment, removal of limitation on the used of net operating losses, advancing the refund of MAT credit, employee retention credit etc.
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CARES Act Provision Update
Carry Back of Losses ❑ The CARES Act permitted taxpayers to carry back losses up to 5 years. The losses generated in tax years 2018, 2019 and 2020 were eligible for the same. The IRS also provided the taxpayers with the ability to fax their refund claims to ensure fast processing.
❑ The IRS has released various FAQs and updates in this regard but most of them have been clarificatory in nature and the general requirements for carry back remain the same.
Paycheck Protection Program (PPP)
❑ PPP loans authorized by the CARES Act may be forgivable, in whole or in part, provided that the taxpayers use the proceeds for qualifying expenses. However, there has been much debate regarding the deductibility of qualifying expenses paid using PPP loans that have been forgiven.
❑ Notice 2020-32 issued by the IRS clarified that taxpayers whose PPP loans are forgiven cannot deduct the business expenses for which they used the forgiven loan proceeds. However, the Senate Bill 3612 sought to reverse this clarification. This bill has not yet been passed in the senate.
❑ Change in ownership rules – As per the clarifications received, the PPP lender will have to be notified of any change in ownership that is more than 20%. Also, SBA consent will be necessary for any 50% or higher change in ownership. Even post the ownership change, the PPP borrower or an eligible successor will remain subject to all obligations under the PPP loan.
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IRS AUDIT EXPERIENCE – INTERNATIONAL TRANSACTIONS
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International Transactions
Transfer Pricing
GILTI
Inter-Company
Debt
IRC Section 965
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Q&A
Ravi YadavarCFO
Zydus [email protected]
Pooja PahadeAVP – Taxation
Startek [email protected]
Shishir LaguPartner - US Tax
Kavit SanghviSenior Manager- US Tax
Ameya ManmadkarAssociate - US Tax
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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