Unveiling Transformative Treasury Regulations: Navigating International Tax Changes in the Era of TCJA

Unveiling Transformative Treasury Regulations: Navigating International Tax Changes in the Era of TCJA

As the calendar turned to 2019, the Treasury Department ushered in the New Year with a flurry of guidance in the realm of international tax, responding to the seismic shifts introduced by the Tax Cuts and Jobs Act (TCJA). This article serves as a concise overview of the proposed regulations associated with the transition tax, Global Intangible Low-Taxed Income (GILTI), the foreign tax credit, and the Base Erosion and Anti-Abuse Tax (BEAT), offering a comprehensive snapshot of the evolving landscape.

1. The Transition Tax: Bridging the Old and New

In August 2018, the Treasury Department issued proposed regulations addressing the transition tax under section 965, a pivotal component of the TCJA. Designed as a one-time repatriation tax on foreign earnings, the transition tax serves as a bridge between the erstwhile and the reformed tax rules.

The TCJA ushered in a paradigm shift by moving from a worldwide tax approach to a territorial-style system. Navigating this transition necessitated a mechanism to differentiate between untaxed foreign earnings accumulated under the previous rules and post-tax reform earnings, which now enjoy an exemption from U.S. tax.

With an estimated $2.6 trillion of untaxed foreign income subject to the transition tax provisions, the proposed rules delve into general definitions in section 965, offer guidance on deductions, treatment of disregarded transactions, foreign tax credit calculations, and crucial election processes. The nuanced framework presented in these regulations aims to provide clarity amid the complexity of the transition tax landscape.

2. Global Intangible Low-Taxed Income (GILTI): Addressing Worldwide Impacts

September 2018 witnessed the release of proposed regulations on the GILTI rules under sections 951A and 250. Emerging as a response to the TCJA, the GILTI rules act as a global backstop to the territorial-style regulations introduced by the tax reform legislation.

Operating alongside the well-established Subpart F anti-abuse regime, the GILTI provisions compel U.S. shareholders to determine their tax liability on a Controlled Foreign Corporation's (CFC) global intangible low-taxed income. Notably, income tainted as Subpart F or GILTI is not exempt from U.S. taxation.

The proposed rules focus on determining the GILTI inclusion amount, relevant aggregation rules, and the interplay of these regulations with other sections of the tax code. While leaving certain aspects, such as the calculation of foreign tax credits, for future consideration, these regulations provide a foundational framework for addressing the complexities introduced by GILTI.

3. Foreign Tax Credit Rules: Navigating the Post-TCJA Landscape

November 2018 saw the Treasury Department releasing proposed regulations on foreign tax credit rules, offering insights into the changes catalyzed by the TCJA. This comprehensive set of rules tackles key aspects, including foreign tax credit limitation categories, deemed paid credits, and the allocation and apportionment of deductions.

The TCJA introduced two new foreign tax credit limitation categories, specifically addressing GILTI income and foreign branch income. The proposed regulations offer transition rules for integrating these new categories into the existing framework. Further guidance is provided on deemed paid credits, particularly in scenarios involving distributions by a CFC of previously taxed earnings and profits.

In a departure from prior practice, the TCJA repealed the fair market value method of asset valuation for the allocation and apportionment of general interest expense. The proposed rules elucidate the new provisions, offering clarity on how deductions are to be allocated and apportioned under the revised regulations.

4. Base Erosion and Anti-Abuse Tax (BEAT): Curbing Erosion Strategies

December 2018 marked the release of proposed regulations on the Base Erosion and Anti-Abuse Tax (BEAT) under section 59A. Applicable to corporations with gross receipts exceeding $500 million, the BEAT seeks to prevent erosion of the U.S. tax base. Notably, it does not apply to individuals, S corporations, RICs, or REITs, with a de minimis exception for companies with low foreign-related party payments relative to overall deductions.

The BEAT calculation involves taking 10% of modified taxable income, with a phased-in rate of 5% for years beginning in 2018 and an increase to 12.5% for years starting after 2025. Addressing anti-abuse and recharacterization rules, treatment of net operating losses and credit carryover limitations, and administrative reporting requirements, the proposed rules offer a comprehensive framework for navigating the BEAT landscape.

5. Additional Guidance: A Glimpse into the Future

While the proposed regulations to date represent a substantial portion of the TCJA-driven changes in international tax, the Treasury Department has signaled that more guidance is on the horizon. Late in December, an announcement was made regarding forthcoming regulations that will address situations related to the previously taxed earnings and profits of foreign corporations. Anticipated topics include the maintenance of previously taxed earnings accounts, the sequencing of earnings upon distribution and reclassification, and adjustments required when an income inclusion surpasses the earnings and profits of a foreign corporation.

Stay tuned for further developments as the Treasury Department continues to shape the landscape of international tax regulation.

About the Author: Tara Fisher

With nearly two decades of experience in international tax, Tara Fisher has navigated diverse professional landscapes, including roles with the U.S. Congress Joint Committee on Taxation, PricewaterhouseCoopers' national tax practice, the University of Pittsburgh, and American University in Washington D.C. As a licensed CPA with both undergraduate and graduate degrees in accounting from the University of Virginia, she brings a wealth of knowledge and expertise to the intricate field of international taxation.

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