USA Trends and Developments Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
expiring provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and introduces or amends a number of individual tax provisions, international tax provisions, state and local tax deductions, and energy transition tax credits. These changes reiterate that the tax struc - ture in the USA is in flux and remains at the forefront of US political and economic consciousness. Various key international tax changes are highlighted below. Modification of CFC pro rata share rules and removal of CFC one-month deferral election Prior law allowed US shareholders of 10% or more of the stock of a controlled foreign corporation (CFC) to defer income under the Subpart F regime (ie, the anti-deferral regime applicable to passive income and easily movable income of a CFC) by only requiring such shareholders to include Subpart F income if they held stock in a CFC on the last day of the CFC’s tax - able year. Thus, midyear ownership changes generally resulted in tax deferral to a selling US shareholder. The OBBBA requires a US shareholder to pick up its pro rata share of Subpart F income if it owned CFC stock on any day of the CFC’s tax year. Prior law included an election that allowed deferral by granting a CFC the right to elect a taxable year ending one month earlier than that of its majority US share - holders (ie, US shareholders who own 50% or more of a CFC by vote or value). This allowed, particularly in the context of the TCJA’s changes to the US approach to international tax, a significant potential deferral of tax on the income of such CFC. The OBBBA removes this election. Downward attribution fix The TCJA repealed a rule (former Section 958 (b)(4) of the Internal Revenue Code) preventing downward attribution of stock owned by a foreign person to a US person. The TCJA removed this rule in an attempt to limit certain transactions meant to de-control CFCs (ie, which would remove their status as CFCs). This attempt to preclude de-controlling transactions had significant unintended consequences. For exam - ple, if a foreign-parented group of corporations also included a subsidiary that was a US corporation, then the removal of this rule caused such US corporation’s brother/sister foreign corporations to be treated as CFCs. Such proliferation of CFC status causes unnec -
essary taxation (and administrative costs and risk) for CFCs unrelated to such CFCs’ own US shareholders within a foreign-parented group. The OBBBA restores former Section 958 (b)(4) so for - eign groups are now less likely to have unintended US CFC status and Subpart F taxation. The OBBBA also adds a new Section 951B which captures and imposes the CFC rules on certain for - eign-controlled US shareholders and certain related foreign corporations (referred to as foreign-controlled foreign corporations or F-CFCs), which is intended to prevent the transactions that the original repeal of Section 958 (b)(4) was attempting to address. CFC look-through rule In a welcome removal of uncertainty, the OBBBA makes a rule in Section 954 (c)(6) permanent that exempts payments of dividends, interest, rentals, and royalties between CFCs from immediate taxation under the Subpart F regime. Global intangible low-tax income (GILTI) changed to net CFC tested income (NCTI) Introduced in the TCJA, GILTI is a US tax regime that was designed to discourage US multinational groups from shifting profits to low or no-tax jurisdictions. While maintaining the principal framework of this regime, the OBBBA makes some significant changes. More specifically, the OBBBA: • has renamed the regime to net CFC tested income (NCTI) and reduces it to a permanent 40% deduc - tion (down from the prior 50% rate), thus yielding a 12.6% effective tax rate (before taking into account foreign tax credits (FTCs) and limitations on FTCs; • increases allowable indirect FTCs to 90% (up from 80%); • limits the expenses allocable to the NCTI calcula - tion (eg, no longer apportioning interest expense and certain research and experimental costs), generally resulting in more FTCs being usable to reduce NCTI liability; • removes an exclusion from the GILTI calculation for a deemed return on a CFC’s tangible assets – resulting in an increase of taxable NCTI for taxpay - ers that own CFCs with material fixed assets; and
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