2016 International Tax Legislation

INTERNATIONAL

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Global trade continued to increase throughout 2016 and with it, increasing attempts to find loopholes and other advantages within applicable Internal Revenue Code Sections. All but a few IRS regulations released throughout 2016 carried the consistent goal of plugging loopholes. And in response to a major IRS loss in Tax Court in the transfer pricing area, the IRS announced that it will appeal the decision to the Ninth Circuit.

BEPS. The Organisation for Economic Cooperation and Development (OECD) made final recommendations in early 2016 on its Base Erosion and Profit Shifting (BEPS) Project.

Comment

The proposals seek to align tax laws to address aggressive tax practices.

Comment

In response, House Ways and Means Committee Chair Kevin Brady, R-Texas, commented that the documents prove that Washington must move forward on international tax reform rather than become victims of inaction.

Country-by-Country Reporting. The OECD, in its BEPS project, recommended that countries require county-by-country (CbC) reporting by multinational groups to report their business activity for each country where they operate. In response, the IRS issued final regulations in June that require CbC reporting by multinational enterprises (MNEs).

Earnings Stripping/Inversions. In April, the IRS issued temporary regulations that addressed corporate inversion transactions structured to avoid the purposes of Code Secs. 367 and 7874 as well as certain post-inversion tax avoidance transactions. TD 9761. As noted, final regulations have addressed earnings stripping transactions by recharacterizing debt between related parties as stock under the debt-equity rules of Code Sec. 385.

FACTA. The IRS announced in July that it will stop treating intergovernmental agreements (IGAs) as being in force and effect after December 31, 2016, unless the foreign jurisdiction that entered into the agreement takes immediate steps, including presenting a plan for bringing the IGA into effect.

Dividend Equivalent Withholding. The IRS provided relief in the form of the phase-in of certain withholding rules under Code Sec. 871(m), which treats dividend equivalent payments as US source dividends. The IRS also advised that additional modifications may be on the way.

Comment

This relief moves what would have been an inflexible January 1, 2017 effective date into a deadline with more leeway.

Code Sec. 367. In March, the IRS adopted final regulations under Code Sec. 367 intended to target shifting of gain or income to a foreign corporation (even when the gain is subject to U.S. taxes), where the US transferor could inappropriately use the foreign corporation’s favorable tax attributes to offset the gain or income.

Triangular Reorganizations. The IRS announced in December that it will issue regulations under Code Sec. 367 to modify the rules relating to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations.

CFC Anti-Avoidance Rule. Final regulations were issued in November under Code Sec. 956 for controlled foreign corporations (CFCs). They track temporary regulations issued in 2015 and also add examples about the anti-avoidance rule and other provisions. TD 9792, NPRM REG-122387-16. At the same time, the IRS released proposed regulations for CFCs that would require a partner in a controlled partnership to determine its share of U.S. property held by the partnership under the liquidation value percentage method.

Code Sec. 901(m) Foreign Credit Rules. The IRS issued temporary regulations in December under Code Sec. 901(m). The temporary regulations also comprise part of proposed regulations released at the same time describing new types of covered asset acquisitions for the foreign tax credit limitation rules.

Foreign-Owned Single Member LLCs. The IRS released final regulations in December governing the treatment of domestic disregarded entities wholly owned by a foreign person for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under Code Sec. 6038A.

Comment

The regulations are intended to strengthen financial transparency.

Outbound Foreign Goodwill/Going Concern. The IRS issued final regulations in December that generally eliminate the favorable tax treatment of outbound transfers of foreign goodwill and going concern value in certain nonrecognition transactions described in Code Sec. 367. The regulations also narrow the scope of the active trade or business exception of Code Sec. 367(a)(3).

IRS Appeals Cost-Sharing Defeat. The IRS filed a notice of appeal with the Ninth Circuit Court of Appeals on February 19, 2016, contesting the Tax Court’s 2015 decision in Altera Corporation, 145 T.C. No. 3 (2015). That major decision invalidated transfer pricing regulations under Reg. §1.482-7(d) (2) requiring related parties entering into qualified cost-sharing agreements to share stock-based compensation costs.