- Good morning.
It's my honor and pleasure
to welcome you this morning
to the 18th Annual NYU/KPMG Tax Symposium.
My name is Larry Pollack.
I'm a former international tax partner
with KPMG, a graduate
of NYU's tax LLM program
and the proud director of this symposium.
This annual conference
brings together high level
government officials, professors
from NYU Law School,
distinguished members of the bar
and KPMG tax partners to explore
and debate issues of current
interest in taxation.
The theme for today's
program is navigating
the sea change of US international tax
under the Tax Cuts and Jobs Act.
This legislation fundamentally
changed the manner
in which multinational
enterprises are subject to US tax.
The statutory tax rate on
corporations has been reduced
from 35 to 21, thereby
making the United States
a more tax competitive
jurisdiction in which to operate.
It moves towards a
participation exemption system
by providing a 100% corporate
dividends received deduction
for foreign source
dividends derived from 10%
or greater owned foreign corporations.
And it provides a tax incentive
for US corporations that
derive certain income
from exporting goods or
services to other countries.
However, on the flip
side, the new system casts
a wider jurisdictional tax net
by imposing current US taxation
to much of the income earned
by US controlled foreign corporations
beyond that caught by sub-part F, albeit
at a preferential
effective federal tax rate.
It also imposes new limitations
on the deductibility of interest expense
and also introduces a new corporate,
alternative minimum tax
styled regime intended
to protect against US base erosion caused
by excessive deductible payments made
to foreign related persons.
One of the stated goals
of US tax reform was
to achieve greater simplicity.
However, the key international
tax provisions contained
in the act are novel in ways that the US
and other countries have not seen before,
thereby creating lots of uncertainty
and thereby adding significant complexity
to what we had before.
The act contains new
terminology and new acronyms.
Global and tangible low-taxed
income referred to as GILTI.
Foreign derived intangible income, FDII.
And the base erosion
anti-abuse tax referred
to as the BEAT.
All of which will be covered
in today's symposium.
Today's symposium will focus
on the policy, legal, economic,
and practical aspects of US
international tax reform.
Our keynote speaker
today is Thomas Barthold
chief of staff of the Joint
Committee on Taxation.
Our distinguished speakers today include
from NYU Law School
Professor David Rosenbloom,
Professor David Shaviro, Visiting
Professor Wolfgang Schon,
and Adjunct Professor Willard Taylor.
From the University of Cologne
in Germany Professor Johanna Hey.
Distinguished members of the Bar,
Kimberly Blanchard of
Weil, Gotshal, & Manges,
Michael Caballero of Covington & Burling,
Steve Edge, Slaughter and
May, London, Mark Levey Baker
and McKenzie, Paul
Oosterhuis, Skadden, Arps,
Slate, Meagher & Flom, Dana
Trier, Davis Polk & Wardwell,
and Matthew Yeo, Steptoe & Johnson.
Leading economists, Alan
Viard of the American
Enterprise Institute.
From the United States
government, Douglas Poms,
International Tax Counsel, US
Department of the Treasury.
Marjorie Rollinson,
Associate Chief Counsel
Internal Revenue Service International.
And representing selected industries
from corporate America Robert Alexander,
Senior Vice President Global Tax
at Ralph Lauren Corporation.
Angela Becka, Head of Global Tax, AIG.
Harris Horowitz, Global
Head of Tax at Blackrock.
And Andre Petrunoff, Vice
President of Tax Planning
at Pfizer.
And from KPMG Peter
Blessing, Adrian Crawford,
Nicky Crighton, Ron Jabrowski,
Anne Hollie, Tad Jackman,
Michael Clausen, Daniel
Roltz, and Tom Sildo.
We will invite audience Q and A
at the conclusion of most
of the sessions today.
But if you wish to ask a question
a microphone will be brought to you.
Just raise your hand
during the Q and A session.
Please note there are representatives
from the tax press and the
news media with us today.
There will be two breaks, one mid-morning
and one mid-afternoon and
a lunch at 12 noon hosted
by KPMG, all of which will be directly
across the hall in Greenberg Lounge.
Administrative procedures for
claiming CPE and CLE credits.
For New York state's CPE, that is
for the CPA's, assuming
that upon arrival you signed
in at the registration
desk, you'll simply needed
to submit your completed
CPE evaluation form
as you exit the program
at the end of the day.
There's no need to formally sign out,
unless you leave early.
In which case you will need to sign out
to claim CPE credits
for the sessions that you have attended.
To obtain New York state CLE credits
for the attorneys, assuming
you've registered in advance
and signed in at the registration desk
and received a name badge,
at the conclusion of the
conference simply drop your name
badge in the basket designated for CLE
and your CLE evaluation form,
and there's no need to sign out.
However if you depart early
and wish to claim CLE credits
for the sessions you have attended,
you will need to sign out.
And for those attending the conference
who did not pre-register
and wish to obtain CPE
or CLE credits, you will need to register.
Sign in at a registration desk
and sign out when you leave
at the registration desk.
Evaluation forms will be at
the registration desk all day.
And the certificates will be emailed
to you within two months.
The CLE certificates will come earlier
than the CPE certificates.
Kindly put your cellphones on vibrate
or silent ring please.
And with that let's commence the program
with a short video bringing us back
to the 20th of December 2017.
- Thank you everybody very much.
And these are the people right behind me.
They've worked so long, so hard.
It's been an amazing experience.
We are going to bring at
least $4 trillion back
into this country, money
that was frozen overseas
and in parts in the world's
and some of them don't even
like us, and they had the money.
Well they're not gonna
have the money long.
And so it's really...
I guess it's very simple.
When you think you haven't
heard this expression,
but we are making America great again.
You haven't heard that, have you?
- Our symposium begins today
with an insightful commentary
by Professor David Rosenbloom on the bold
and brave new world of US
international taxation.
David Rosenbloom is the
James S. Eustice Visiting
Professor of Taxation and the
Director of the International
Tax Program at NYU Law School.
David is a member of Kaplan & Drysdale
and served as international tax counsel
and director office of the
International Tax Affairs
at the US Treasury Department.
A frequent speaker and author
on tax matters, Professor
Rosenbloom has taught
international taxation
and related subjects
at Stanford, Columbia, the
University of Pennsylvania,
and at Harvard Law School
and other educational
institutions around the globe.
Professor Rosenbloom.
- All right thank you very much Larry,
and I guess I'm the NYU representative
to welcome everybody to this institution.
I'm going to speak to you
about some general matters
in the Tax Cuts and Jobs Act,
and I am going to try to stay
away from technical issues,
but I had for just for the
purpose of illustrating
some things I may have to
make a few technical points.
When I work with this
statute, notwithstanding
the President's comments,
at least the international provisions,
the quote that comes to
my mind most often is
from Casey Stengel about
the 1962 Mets which was,
"Can anyone here play this game?"
Let me see if I can
figure out how to do this.
There we go.
No that's the wrong direction.
Larry I'm gonna need help here.
I'm taking this to the next level.
(faintly speaking)
Oh this one, okay, excellent, okay.
So.
Let me start by talking about the policies
in this as evidenced in
the statute as a task.
Obviously the big development is
the reduction of the corporate
rate from 35% to 21%.
The corporate tax rate is the
most important single input
in international taxation, certainly
at the corporate level and maybe even
at the individual level.
But there are a lot of other policies
in this statute, and it is necessary
to spend some time with the statute
in order to identify them.
One of them that I did identify
in an article I wrote on the GILTI regime,
global intangible low taxed
income is that because
the statute uses the same test for GILTI.
In other words you don't
reach the level of GILTI
in the hands of a controlled
foreign corporation
until you go through 10% of
the return on tangible assets.
Use that same test
for FDII, foreign derived
intangible income.
And because GILTI by comparison
with the alternative is
something that taxpayers
would probably not want to have.
They prefer to have the 10%
return on tangible property,
because that can be earned
and repatriated free of tax.
And FDII is something the
taxpayers would want to have,
because that's basically
an export incentive,
but you have to go
through the 10% return on tangible assets.
So when you think about
using the same tests
for FDII and GILTI, I think
it's pretty clear that the
message is that taxpayers
should take their tangible
property and move it abroad.
If they move tangible property abroad,
they will have less GILTI,
and they'll have more FDII.
And I think is a good thing.
Now, moving tangible property
outside of the United States was not
to put it mildly one of the headline
advertisements for this statute.
But I think it's in there.
I think it's indisputably in there.
Other policies that are
reflected here involve
intangible property and
indeed moving assets
out of the United States generally.
It is true that the statute
in various ways makes it
more difficult to move
assets from the United States
to foreign entities
without incurring a tax.
On the other hand, I think
most of those moves qualify
under FDII, so I question
whether they really wanted
to provide a beneficial rate
for transferring intangible property
from the United States abroad.
But that again seems to me to be the case.
Another underlying policy
here of perhaps less important dimension
but I think it's gonna play out
in a significant way is that
the statute heavily penalizes
CFC status, and if you look
back over time we've been
through periods in this
country when had been
a CFC was a terrible thing.
That was sort of after 1962.
And of course the first
four court decisions
on sub-part F were all involved
the question of whether
an entity was or was not a
controlled foreign corporation.
Then we passed through a period where
because of the way the
foreign tax credit worked
people scrambled to have
controlled foreign corporations,
'cause that put them in
a preferential basket.
And I certainly participated
in the years where people took options
on other people's stock and
things like that in order
to achieve CFC status.
I think we've gone back to
the status where we started,
where CFCs are not good by
comparison with the alternative,
because 10 50 companies
in this statute get a remarkable deal.
They earn their income free of tax.
They're repatriated free of tax.
So I think there will be some
interesting movements in that direction.
On the other hand, one of
the aspects that's going
to deter that, and it's
gonna be interesting
to see how it plays out is the new rule
on downward attribution
of stock to create CFCs.
Those of you who have followed
this I apologize I am getting
into a little bit of a
technical aspects here.
But the 958 change is going to result
in what look to me to be thousands
and thousands of new controlled
foreign corporations, so.
You go into a joint
venture with another party
you may all of a sudden end up
with all of their companies
as your controlled foreign
corporations which is gonna
be kind of interesting
to see how the revenue
service works that out.
Those are constructive bar.
They're not direct or indirect ownership.
But they nevertheless are CFCs
with potential implications.
So I think the first thing I would say is
the corporate rate, yes,
that's the big policy here.
But there are other policies,
and they're not entirely
what I would call coherent.
It's not clear to me what the zigs
and zags are from the standpoint
of any particular company.
And I think it's gonna take time,
and it's gonna be very company specific,
at least to the extent I've gotten
the job of interpreting the statute as
to what to do in response
to the new incentives
and disincentives in this statute.
Now the second point on my slide is why
Larry asked me to talk about this,
because I did do an article
which I think is referred
to here on the next slide.
Very quickly, after the statute came out.
It wasn't that I was following
the statute that carefully,
but I was obliged to give a talk abroad.
And so I had to scramble.
It occurred to me that in many ways
the Tax Cuts and Jobs Act
is sort of an America first
type of legislation, and it has
aspects of it that are
really quite revolutionary
just beneath the surface.
The ones that aren't beneath
the surface, that are
on the surface and that are
very important that I'm sure
you'll hear about today
are the complete disregard
for the US treaty network
which is gonna play out,
because it may be a surprise to some folks
but the tax treaties of
the United States are
the supreme law of the land.
And the statute says not
one word about treaties.
And I for one don't
think that the statute is
in conflict with the treaties
which means that I think
the treaties still apply.
That I'll leave it to
others to develop that.
But I think there are
serious treaty issues
certainly involving the base
erosion tax, the BEAT tax.
And there's equally serious
treaty issues involving GILTI.
Although it's a practical
matter probably less important.
There are other treaty
issues in the statute.
The FDII, it seems to me, raises questions
under our trade obligations.
I'm not a trade lawyer, but it does look
to me very much as though
it's an export incentive
and will not be greeted with open arms
by the rest of the world.
But there are other
aspects of this statute
that also are troubling
from the standpoint of
the United States place
in the international tax
world and particularly
our historic leadership in that area.
For one thing the statute
has a very strong tendency
mostly in section 965,
the repatriation regime
and in the GILTI regime, 951A
to divide the world
between the United States
on one hand and everywhere
else on the other.
We love all for GILTI purposes, 951A.
We love all CFCs together.
That has not traditionally
been the US way.
There are aspects of our law,
I mean, certainly the sourcing provisions
where we see the world as a dichotomy,
the United States and everywhere else.
But a lot of our basic
taxing provisions have been
individual country by
individual country, indeed,
individual entity by individual entity.
That seems to go by the wayside.
And that's got some implications.
No given country is really gonna be able
to say how income earned
within its borders plays
out when that income hits the US return,
because the return is gonna be based
on all CFCs lumped together.
Another aspect which also
I think is interesting
and potentially in the
long term troubling is
the downgrading importance
of the foreign tax credit
which is generally the flip side of going
to a so-called territorial system.
Let it be said I don't think we went
to a territorial system.
I think that's a bunch of bilge.
But nevertheless you hear
a lot of talk about territorial system.
That means moving away from
the foreign tax credit.
You move away from the foreign tax credit
the US has less interest
in what's happening
as a tax matter in other countries.
And I think in the long run with less skin
in the game that is gonna play out
in our relationship on a situation
by situation basis with other countries.
It does seem to me that there's
a potential of that done
with mutual agreement
procedure the treaties.
And indeed on the way the seriousness
with which other countries
take US statements
about what they might do
or should do or could do.
I mean, if the United States
is gonna act selfishly
in adopting a system
which is very US oriented,
I'm not at all sure why other
countries shouldn't change
their attitude toward US accounts
to persuade them to do various things both
in general and in specific cases.
And in that connection
there's a lot of talk
when the statute passed about growth.
But my impression, I'm just one person
and out of hundreds of
thousands of people trying
to read the tea leaves here,
but my impression is that growth
for most US companies is abroad,
not in the United States.
And I don't see that this
statute is necessarily gonna be
particularly helpful for
growth of companies abroad.
All right, so point three on my outline
and this goes to statements
that you regularly here
about how terrible this statute is,
and I'm not speaking about
the statute as a whole.
By the way I would admonish everyone
in the room that in assessing the statute
I would basically not pay attention
to what anybody says, including me.
Basically, form your own opinions.
This is really a very, very mixed bag.
This is not a clearly good
or clearly bad statute.
The international provisions
have a lot of things
in them that are quite
interesting and quite
from a reformer's standpoint
from someone who wants
to simplify the laws and make them work,
there's some very good things in here.
In fact, there some aspects of
the international provisions
as my outline says that reformers
could have only dreamed about.
There would have been no way
to get these things enacted.
The wholesale adoption, for
example, of the IRS position
in the Amazon case
by statute is quite an
amazing development.
The end of deferral which
is what I consider GILTI
to be, and we can talk about it.
We will talk about it.
But basically, GILTI is a stake
in the heart of the deferral
regime it seems to me.
Much less important but important
to some people, sales of partnership
interest, override of the tax
court decision in that regard.
The tough 163J.
All of these provisions
are really quite striking
and they are gonna bite it seems to me.
And it's kind of amazing
to put them all together.
I'll come in a minute
to what I think are some of
the problems with what was had.
But the statute is not
unequivocably pro corporation
or pro business or pro anything.
It's really a very, very
in my opinion, a very, very mixed bag.
Now I will say that the statute
does reflect many unstated
assumptions and sometimes
quite dubious assumptions
about pre-existing law.
And it does raise questions
about statutory provisions
that I think most of us
who worked in this area
thought were material
for the history department and law school
and universities and not the law school.
We're now all of a sudden headed
into a debate about
the meaning of the
accumulated earning stats.
I mean, whose dealt
with the accumulated
earning stats in decades?
We're wondering about how section 962,
the election to be
taxed at corporate rates
by an individual earning
sub-part F income.
We have lots of questions
there that were certainly not around.
And there are some assumptions here
about how lots of aspects of sub-part F
actually work, including
sections 961 and 960.
956, the past couple
days I've been ruminating
about what's left of 956 frankly.
I think there is something left in 956.
It is a fantastic trap for the unwary.
So one of the underlying themes
here is that I'll come back
to this in a minute is this statute,
the international provisions
that we're dealing
with were not enacted
in substitution of the
pre-existing regime.
They were layered on top
of the pre-existing regime.
And there was not a lot of thought
or maybe there was a lot of
thought, it's not evidenced
a lot of thought about how
the new rules would intersect
with the old rules.
So that's some comments for you.
Now going to a few more things.
Language, I mean I sort
of think of this statute
as the 1984 Tax Cuts and Jobs Act.
Not that it has anything
to do with the year 1984,
but the language is Orwellian.
I mean, you have to read two and three
and four times to understand what is meant
by globally intangible low-taxed income.
I'm not the first person to
observe that the statute,
the GILTI rules reach
income that is neither
low-taxed nor intangible, at
least by anybody's imagination.
And I'm not the first person
to make this comment either.
It's like the famous, I
think it Voltaire's comment
about the Holy Roman
Empire which was not holy
or Roman or an empire.
And you get that feeling
reading the statute.
So I have doubt here.
War is peace, slavery is freedom.
And in deferral is territoriality.
You take it anyway you want.
But I do advise looking at
actually how these rules work
rather than listening
to people describe them,
because honestly in my experience
an awful lot of descriptions, including
by people who should know
better, are just flat out wrong.
So let me shift and talk all at once
about the next six, seven, eight,
a little bit of nine, the problems
with the international
provisions in broad terms.
I think the biggest problem
I've already identified.
There's a layering of the new upon the old
without a lot of evident
thought, there's some,
but not a lot of evident thought
about how the two would mesh.
So for example, I mentioned
956 which still has vitality.
You could actually if you
want to go out of your way
to incur US tax by
investing in US property
with respect to earnings that could
otherwise be distributed tax free.
If you wanna do it, you can do it.
The big one which I think
everybody is aware of is
the application of the allocation of a
portion of rules of
treasure regulation 1.861-8
and the subsequent regulations.
I mean, those regulations weren't touched.
They're part of black
letter international tax law
in the United States.
But there is some evidence
in section 904B5 that someone
was aware that they were
out there, and if you read that statute,
you'll see that they were very
explicit that the interest
to the expense, the
deductions would not be taken
into account with respect
to 245A exempt income.
But the statute as I read it is pretty
clear that you do take them into account
in computing the other baskets, certainly
the GILTI basket which it also talked
about the branch profits tax basket
which I oughta say
something about in a second.
But once you start taking the expenses
into account, particularly
in the GILTI basket,
which is GILTI of course
has a 50% deduction
for a corporation attached to it.
A lot of companies in my
experience are gonna be
in the excess credit,
particularly if they disregard
the 20% haircut on the foreign tax credit
which personally I think they
could do it in the treaties
at least at the first tier.
So if you throw deductions
against exempt income
which effectively if you're
in a excess foreign tax credit basket.
You throw deductions against that basket.
You basically don't get the good options.
I mean, you can claim them,
but they're thrown against exempt income.
So you lose any economic benefit.
So those are examples.
There are lots of others.
I can't be comprehensive here,
but there are lots of other
examples of aspects of
pre-existing law that were not
really touched or were
touched only in passing
and people are discovering
to their astonishment
we really do have to allocate
and apportion deductions.
Well yeah.
I mean, that's what the statute says.
So that's one big problem.
Another problem I've already alluded
to but I'll say it more clearly now is
the lack of any mention
on the tax treaties.
I mean, that's gonna be
left to the courts, I guess.
I don't think that this later
in time rule which is reflected,
albeit, I must say
reflected very obliquely
and not very clearly
in section 7852D of the
internal revenue code.
I don't think that's gonna
answer the question here as
to how the treaties apply.
And the treaties do things
that are sort of startling.
For example, they clearly
give a deemed paying credit
to the first tier of a
first year corporation
in a treaty pact.
I mean, it's just crystal clear.
And moreover, the US
has written extensively,
US Treasury, in technical explanations
and otherwise that that's what happens.
And the statute doesn't do anything to it.
So somebody's gonna have
to figure out how these
code provisions intersect
with these treaty
commitments that we've taken
on what 60, 65 times.
That's gonna be interesting.
And it's gonna, I think
alot of that, since I
personally don't see much chance
for a statutory fix to
any of these things soon.
I think that's gonna fall
to the revenue service
and the treasury regulations.
The revenue service of the administration
and then, if it goes on
long enough, the courts.
A third aspect of the
statute that I think is
problematic is that there's a virtual
absence of transition rules.
So you're struggling.
You scratch your head about what happens
to excess credits coming
from the pre-effective dates
for the new years.
Where do they go?
I mean, do we actually take excess credits
from say 2017 and assign
them to a 2018 GILTI basket?
I mean, that's a pretty startling result.
I don't know.
I mean, I suppose I
haven't been a participant
in conversations with the Treasury.
So I don't know whether they've come out.
They certainly haven't
put out anything public
on any of these things.
So I think there's a lack of that.
I think some of these have been addressed.
There are issues involving the carry
over of excess interest of the 163J.
Just generally the transition
from the old rules to the new
rules was not very well dealt
with in this statute.
And that's, if you think back
to 1986 where there was
a lot more attention paid
to that, that is really, I
guess, reflective of the six week
time span in which this
statute was developed.
So that's another big problem.
So the first thing is
layering old on top of new.
The other is relationship to treaties.
Third is the absence of transition rules.
The fourth is just the language.
The language in the statute
really is almost impenetrable.
I mean, for example
who can say immediately
the difference between a
specified 10% owned foreign
corporation and a qualified
10% owned foreign corporation?
They're both in the statute.
One is 245A.
One is 245.
You've got a lot of this fairly turgid
and not obvious language
sometimes reflecting
sort of counterintuitive
propositions, like
for example, you could have as you know
I think you will know, you could have
a controlled foreign corporation
with no intangibles
whatsoever earning only income
from tangible assets but if that income is
in excess of 10% of the adjusted
basis of those assets minus
some interest deductions
which are taken into account
you're int intangible world.
That's intangible, because I guess
this is an economist concept that anything
in excess of 10% return on
tangible assets is intangible.
And that's sort of a
startling proposition.
Another one there by the
way that before I forget
I do wanna mention is this
new branch profits desk.
I think there's (mumbles)
not everybody has
to deal with it, 'cause a lot
of companies don't operate
through branches, but branch profits,
first of all, is not US statutory lingo.
I mean, that's not something we've used
at the internal revenue code.
Where that comes from is the treaties.
Article VII of the treaties
have a business profits concept,
and there's a lot of history
as to what that means, both
in OECD material and not
surprisingly in US material.
So I don't know
whether that's all been
picked up there or not.
I don't know, for example,
whether there's allocation and
apportionment of deductions
against income that is assigned
to the branch profits basket.
If you look to the nearest thing
that I can think of that is
similar to branch profits
which is the separate economic
unit rules of the dual
consolidated loss regulations
you don't pick up the US deductions.
I mean, admittedly that's
done for a different purpose
than the 904 limitation.
But I can see some very
complicated questions
about what it means
to have a separate business,
branch profits basket.
And then finally but
probably of less importance
to most people in this room, but probably
for some, the statute basically
disregards individuals.
I mean, it's as though
the whole world is made
up of corporations.
And individuals really get
hammered in the statute.
I mean, you don't get the
50% deduction for GILTI.
But you do get the inclusion for GILTI.
So the obvious thing to do is
for an individual who is a US shareholder
in a CFC is to insert a,
one of two things, insert
a domestic corporation between
the individual and the CFC
or make a 962 election.
You insert the domestic corporation.
You run into issues under the
accumulated earnings stacks
if you intend to not fully distribute.
If you fully distribute, you
haven't achieved anything.
Under 962 the tea leaves that I'm reading
in the notices that have been put
out under the repatriation
regime are suggestive that
we may not get the ability
to claim the 50% GILTI
deduction if we use 962.
The 962 regulations are
basically hostile toward deductions.
And there's litigation in the tax court
which I'm sure some of you know
about whether 962 really does create
a hypothetical domestic corporation.
Probably not.
Well whether it's just a rate question.
And I think the note
that IRS is coming down
on the latter direction.
All right, so let's see.
I will say the last point on this slide.
The only way really that you can't read
the statute and understand
it in the abstract.
The meaning comes out
when you try to apply it
to a diverse set of facts.
And then you really get to
see some of the intersections
and some of the errors in the statute.
There are errors in the statute.
There's some things
that are flat out wrong.
For example, the one that
I think everybody knows,
some know anyway, is that distributions
from a controlled foreign
corporation that has GILTI income.
Distributions that attract
a foreign withholding tax.
The 951A statute refers to 960B.
So you get to claim a credit presumably
in the GILTI basket which
is where it should be.
The statute however seems
to put those credits
in the branch profits basket
which has gotta be wrong, right.
I mean, there's no branch in the picture.
So that's just a flat out error.
But I wonder and I'm sort of curious as
to what would happen if
that error stays uncorrected
for a long period of time.
It's clear.
It's a clear rule.
So anyone who tells you and
maybe people up here during
the day will tell you
just read the statute.
If you just read the statute,
you're gonna find some
really crazy results.
I mean, a perfect example those
hundreds of thousands of new
CFCs what are we gonna do
with all of those?
All right, so there
are, as I've just said,
there are lots of undiscovered,
at least by me, nuggets in the statute.
There are discontinuities
with the old rules going
to the new rules.
There are errors.
There are apparently
unintended consequences
which I think the Treasury
is struggling to correct.
My sense is, having myself
been at Treasury, albeit
in the antediluvian period,
that there are limits
to what the Treasury can do.
I don't think they can simply come out
and say certain things.
I don't think they can come out and say,
for example, that what the statute
clearly says it doesn't say.
And they can say it,
but then they're gonna have to defend it.
So I think that the statute is filled
with sort of things that
have you either slapping
your thigh or scratching your head
or doing other things, just trying
to figure out what they
mean and why they said it.
Now my point 11 here
will startle some people
with listen to the
Treasury say we're gonna
all have this out in a 180 days.
I actually amended my point 11,
because I originally had that, let's see,
I've said eight to 10 years
for the development of regulations.
I originally had 10 to 12 years.
And some people kept telling
me, oh that's ridiculous.
Well, those of you who've
been in the Treasury,
sure they can get the
low-hanging fruit in a year.
And that's what they're doing.
That's what these 965 notices are.
They've had to deal with that.
And they will have to deal with it.
And by the way, I haven't
(mumbles) all with 965.
That's got it's own series
of issues and problems.
One of them, for example, that some of my
colleagues know that I was
rather fond of thinking
about is since 965 is
a sub-part F inclusion,
so you come in under 951.
And 951, of course, plugs you into 960,
because in a sub-part F
inclusion, in the old days,
we used 960 to bring up the credits.
And as I read 960 there is
no requirement that companies
below the third tier be
controlled prior corporations.
Why would you ever have
had such a rule in 960?
It only applied at the
(mumbles) foreign corporation.
So I think that under 965
you can access credits
below the third tier.
I realize that there are other people
who don't necessarily believe that.
I read the statute.
I think that's a perfectly
legitimate position.
So there's a lot of unexplained
and difficult things that
they have not dealt with
yet even in their 965 notices.
I think the only other thing
I'm gonna say is that I keep
on learning things about this
statute as I work with it.
Virtually everyday there's
something that I'm learning.
I expect to learn a great deal today
from people who've been working
in a different angle than I have.
And I think the materials
which I have printed
out and actually gone through
are remarkably interesting
on all of the statutory provisions, so.
I think all of us stand to
learn a real, a lot today.
I have only a couple of seconds.
If anybody has any
questions, I will take them.
Otherwise, I will thank
you for your attention.
Yes.
(faintly speaking)
Well that's a question
for Mr. Barthold when he's here at lunch.
I haven't found much
in the legislative history that's answered
questions that I have or even addressed
questions that I have.
I think in the Blue Book,
I'm sure they're collecting things.
And they may try to write a little essay
in the Blue Book.
But there aren't too many tax
issues that only go in one direction.
It's hard to imagine.
There are some, but not too many.
There's usually somebody
on the other side.
And I don't personally
think, notwithstanding
the Blue Book, the respect we have
for the work of the Joint Committee,
the statute says what it says.
And I don't think there's
limits to what they can say
to reverse plain language in the statute.
And a lot of the plain language
in this statute says things
that I don't think were intended
or that are erroneous.
For example, take the simplest one,
this putting the credit
for withholding taxes
on distributed GILTI income
in the branch profits basket.
What can they say?
That's a mistake.
We all agree it's a mistake.
So what?
It's in the statute.
I don't know whether there is a doctrine
in a legal matter in
court that you can say
I'm sorry your honor,
but that doesn't apply,
'cause it was a mistake.
I don't know.
Other questions?
I don't find legislative
history here that helpful.
Thank you very much.
(audience applauds)
- Thank you David.
Thank you Professor Rosenbloom
for you colorful commentary which sets
the foundation for today's symposium.
Our next panel will address
the new anti-deferral regime,
global and tangible low-taxed
income or GILTI, focusing both
on the mechanics and the practical
applications of the new regime.
Interestingly, as Professor
Rosenbloom noted that US
international tax reform was advertised
with the goal of moving our system closer
towards a territorial taxing system.
However GILTI obviously goes
in the complete opposite direction.
Panelists include Pat
Jackman, Paul Oosterhuis,
Ron Dabroswki, and Marjie Rollinson.
Pat Jackman is an
international tax partner
with KPMG's Washington
national tax practice
where he specializes in cost quarter M&A.
Pat is a frequent speaker, writer,
and is coauthor of a leading
international M&A tax treatise,
"US Taxation of International
"Mergers, Acquisitions
and Joint Ventures."
Paul Oosterhuis is a counsel
with the Washington DC office of Skadden,
Arps, Slate, Meagher & Flom.
Paul is well-known in the
international tax community.
Paul is a frequent author and lecturer.
He has taught international tax
in the tax LLM program at Georgetown
and has testified before a
congressional tax writing
committees on various
tax legislative issues.
Ron Dabrowski serves
as the technical deputy
to the principal in charge of KPMG's
Washington national tax office.
Prior to rejoining KPMG
in 2014, Ron served
in a variety of executive positions
in the federal government.
They including special counsel
in the Treasury Department's
Office of Tax Policy,
International Tax Counsel on
the majority staff of the
Senate Finance Committee
and deputy associate chief
counsel international, technical
at the IRS chief counsel's office.
And Marjie Rollinson serves
as the associate chief counsel
international at the
Internal Revenue Service.
In that role Marjie is responsible
for legal advice, guidance,
and support to the IRS,
to Treasury, and the public
on international tax issues.
Pat over to you.
- Thanks Larry.
So the way we're gonna set
this up is I'm gonna try
to provide an overview and some basics,
but we'll move pretty quickly.
Paul's gonna cover some of
the foreign tax credit expense
allocation issues that David alluded to.
And then Ron is gonna cover
how to operating models change
in the post-reform world.
And I guess you're also gonna deal
with how do individuals fare under GILTI.
And Marjie will be commenting as she--
- Telling us what we got right and wrong.
- That's right.
- War is peace.
- War is peace.
- So I guess at this point
you can't ask this question,
because, again, as David said
and others have said,
the GILTI regime is not
a territorial system.
It is in a worldwide taxation
and with a foreign tax credit mechanism
to relieve double tax rather than taking
the approach of a minimum tax.
And so with a foreign tax
credit mechanism, again, leaving
this all on Paul, we've
got all sorts of issues
about the 78 gross up, the
expense allocation, separate
basket, a lack of
carry-forwards and carry-backs.
But it's fair to say that GILTI is far
away from a territorial system.
In terms of mechanics, GILTI
I guess like a lot of tax has
a flavor of almost like
sort of a Russian doll
where you sort of take one definition.
You peel that back.
You get to other definitions
and so on and so on.
But just to start sort
of high-level, quickly.
So GILTI, the actual calculation is net
CFC test of income minus
a net deemed tangible income return.
And so that is the basic
in terms of the formula.
In terms of what factors
into net CFC tested income,
it is an aggregation.
And David had alluded
to that we've moved away
from focus on separate CFC by CFC.
We're gonna aggregate
all of the tested income
and tested losses and
then we're gonna take
the net amount of that by US shareholder
and subtract out, I'll
call it a modest return
on tangible assets
which is this 10% return
on qualified business asset investments
which are your tangible assets.
And importantly again, keep alluding
to what David said earlier, not only
maybe wanted to debate a 10% return
but rather than fair market
value of tangible assets,
it's tax bases of tangible assets.
In terms of tested income,
it is gross income of a CFC
other than certain types of income.
So ECI, sub-part F income,
whether one elects high tax or not.
And then I guess the Oyong Gas folks.
BOGE is excluded, and then
finally dividend income.
So you take all your gross
income, less those items,
and take into account
allocable deductions,
and you come up with
tested income for each CFC.
And then you aggregate
that by US shareholder.
So how do we get from a 21%
rate to what people refer
to as a 10 1/2% rate for DLT?
The mechanism is the
section 250 deduction.
So the US shareholder is able
to claim a 50%, assuming
there's sufficient taxable
income is able to claim a 50% deduction
and therefore get to a 10 1/2% rate
before taking into account
the foreign tax credits.
So that seems like it's a ways off.
But that deduction will go down in 2026.
And I guess another observation is
it is a deduction at the US shareholder.
It is not an exclusion of income.
It is not a DRD mechanism.
The mechanism to get the
reduced rate, again, is
a deduction of the US shareholder level.
One question if I kinda skirted
over a little bit is so currently
the aggregation of tested
income is done US shareholder
by US shareholder even when
US shareholders are members
of a consolidated group.
There has been some speculation,
somewhat similar to 965, as
to whether members of the
group might be treated
as a single US shareholder
for purposes of GILTI,
but at least currently the statute does it
US shareholder by US shareholder.
But in terms of taking the 250 deduction,
and there's a lot of provisions
that have this question
about do I do it at the consolidated level
or individual US shareholder level
who think that the 250
deduction would be done
on a consolidated basis.
I don't know if any of
that interests you Marjie.
- It is very interesting (mumbles).
(panelists laugh)
I think it went through quite well.
It's a very unusual regime
in that normally sub-part F income,
and David makes this good point that these
rules have been layered
on top of our old rules.
So there's a piece of
the legislation that says
and by the way 951 cap
a's should be treated like
your regular sub-part F inclusions
for various provisions of the code.
But what's funny about it is stuff happens
at the US shareholder levels that impacts
what's coming up from the CFC.
So for example it could
be that one CFC has no,
no hard assets at all.
And yet because someone else has hard
assets that CFC will not have
100% of its income be GILTI,
because once you figure
out what your inclusion is
you push that down to every entity
and pull GILTI out accordingly.
And so to ask the question
what's gonna happen
at the consolidated level,
the consolidated people have
funny views about like,
in these meeting to pay
for things that other entities contribute.
But it does make you wonder
how a regime is gonna work
where so much has to happen
at the shareholder level
and then get pushed down.
And so I'd be interested to
know what people are doing
for financial statements right now.
I assume people are calculating
it on consolidated basis,
because that's what people
would've expected to happen.
But I don't know.
Ron what are people doing?
- Well I think a lot of people
are looking at the issues.
And again it is interesting.
I think here the section 250
deduction is analytically
a little different.
It involves FITI and GILTI.
It involves more directly foreign derived
and tangible income and GILTI.
It involves much more closely
a computation of taxable
income, and it relies on the
computation of taxable income
at the consolidated return level.
And there is supreme court case law
on sort of how we view taxable income
within a consolidated group.
So like so many things here,
people are working there way
through and are eagerly awaiting
guidance from government.
- It will not be eight to 10 years.
I'm a little bit offensive.
I just wanna say that right now.
- No I think it's important
to understand a little bit
about why did they do it this way, right.
Why did they do it
at the US shareholder level
instead of at the CFC level?
And the answer is they
were trying to help us.
First of all, they wanted the regime
to have some element
of territoriality in it
so that there was some income
that was exempt, right,
rather than having just worldwide
taxation of all of our income.
So that's how we got the basis times 10%.
But then a lot of folks in the room
and certainly clients of mine said
to them well gee, if you're gonna do a CFC
by CFC, are CFC's that are
getting a return that is maybe
not much higher than 10% rate of return
on assets are paying high taxes
and our CFC's that
don't have much tangible
assets are paying low taxes.
And so we're not gonna get
the benefit of kind of the
minimum tax blending of credits
unless you pull the QBAI calculation
out of the CFC level and up
to the US shareholder level
and bring all the credits up
and blend them as if there were one CFC.
And so that is what motivated them
to do that is my impression.
And that was something
that where they were trying
to help taxpayers be able
to take advantage of
their effected tax rates
in different jurisdictions
with different asset mixes.
And it does create a lot of complexity
when you push that on
top of sub-part F income,
or sub-part S structure and
the more tax credit structure.
But it was there to try to
accommodate taxpayers desire
to get the full benefit of their credits.
- Right, and what your pointing out is
they're sort of aggregation of CFC's up to
for the moment a single US shareholder.
Then there's the question
of should I aggregate US
shareholders that are part
of a consolidated group
in some sense as well so I don't have.
If I've got tested loss
under one US shareholder
and tested income under a US shareholder
am I not able to utilize that tested loss,
because it's US shareholder
by US shareholder
and how interest expense which
is maybe a lead- in to QBI
how that kinda plays in is also relevant
for doing it US shareholder
by US shareholder.
So QBI which is the acronym for getting
to the tangible assets and
the 10% return that offers
the possibility of no tax under GILTI.
I'm gonna call it exempt income.
But it's income that isn't currently taxed
and could qualify for 100% participation
under 245 cap a as a distribution.
But again, as David noted,
for some taxpayers it could
either be a trap for the
unwary that if they had
a 956 loan, that exempt income gets taxed
in the US at 21%.
For the wary taxpayer as it
may becomes an opportunity
to bring back excess foreign tax credits
with doing an affirmative 956 play.
In terms of what factors into QBI,
it is, as I noted, it is tax
bases, not fair market value.
And it's done on a quarterly
average calculation.
Seems like a lot of work
for accountants and others
to do this for all of the tangible assets
for all of the CFC's for various groups.
The interest add back, I think this is
the case, is that to
the extent that you have
sort of leveraged your
tangible assets that is
in some cases disfavored in
that your interest expense
to the extent that the
recipient of the interest
income is not factoring in
to the GILTI calculation, if you will.
If it's, for example, third
party interest expense
or interest expense owed
to the US that interest expense
reduces your 10% QBI return.
Tested losses.
Tested losses for the
most part are not favored
in the sense that a CFC that
is generating tested losses
you can't access any
foreign taxes that they pay.
You don't have the ability
to have whatever tangible
assets that they have factor
into your QBI return at
the US shareholder level.
And...
- This seems to be another
strange sort of policy choice.
I mean, the first inclination
is well if we're gonna go tax
all the CFCs at once, we
oughta go give benefit
for losses and some CFCs and
offset the income in others.
But then you have all these
ancillary consequences
where your affirmative tax attributes
in the loss CFC just get disregarded,
so the QBI, the foreign tax credits.
And that kinda mix of we'll consolidate
but then we won't quite
consolidate all the way
I'm not sure I've heard
an explanation for it.
But it is a sort of reality.
And if you have a CFC
group that you have some
expectation of losses and
some maybe it's new market
or just starting out and more
established profit making
in another, it's a real
issue to deal with.
- So my last thing so we can sort of get
on to the main act, if you will, is
just that to the extent that
we've got a GILTI inclusion,
and GILTI is borrowing
from a sub F concepts.
We didn't get into it,
but when you're looking
at the US shareholders GILTI inclusion,
the GILTI rules are borrowing
the pro-rata share rules of sub-part F
to figure out what the GILTI inclusion.
And then to the extent that
you do have an inclusion
the PTI concept is there to
prevent double tax with respect
to the earnings that have
been included in the US.
And there's a few kind of quirky
things that are noted here
in the statute, sorry on the slides,
in terms of are you
getting when you have a
multi-tier structure is the
basis that you're getting
in the lower tier CFC going
to prevent double tax.
To the extent that that
stock of that lower tier
stock sub is sold, the basis bump is only
for sub-part F purposes
which wouldn't include GILTI.
- And that's a good point that the, again,
the statute says when you go read
these other sections, treat 951 cap a
which is GILTI, like 951
little a, sub-part F inclusion.
What I also sort of get
from the statute is there's
a feeling that we need to sort of treat it
as though things were a net flat structure
and not tiered with respect to GILTI.
So for example a distribution by one CFC
to another that distribution
now is gonna pull up as...
I'm sorry do you have a sale,
the 954 E dividend comes
directly at the sub-part F and
gets the 245 cap a deduction.
It's only category sub-part
F will get that deduction.
But to me that's trying to
treat the structure flat
which I think could
inform how we should look
at 961 to see when we read it.
When we read it and it's talking
about what happens with
951 little a inclusions
and that it gives you the basis
to block additional sub-part F on the PTI.
I think that'll inform how we looK
at it with respect to 951 cap a.
- Okay.
Why don't we lets say
move to the main act?
Paul's gonna take us through.
- Yeah, just one comment on that.
I mean, the irony is
I'm not sure we need PTI
now that we have 245 cap a.
What positive purposes PTI--
- If you're someone who
does not have excess credit
in the GILTI basket,
you would wanna be able
to bring the credit up with
the PTI and get them, right.
- I can see that that can help taxpayers.
I just think structurally
is that enough reason
to preserve though, from the policy point.
Obviously, it's in the statute.
I'm just saying if we were sitting
with a blank slate and
drafting, once you have
an exemption I don't think
you would have a PTI concept--
- It wouldn't be good--
- Give up 986 C, I mean, the FX point.
- Right.
- All right, so let's go
to the foreign tax credit.
Before we get to the expense allocation
which for some of us is what
we groove on these days.
Let's talk a little bit
about baskets so we have the context.
Now, Professor Rosenbloom,
Marjie said that it's clear,
the section 78 gross up with respect
to GILTI income is in the
general limitation basket
or at least that's the way I
read what David was saying.
- (mumbles) foreign branch basket.
- Or the foreign branch basket.
Do you agree with that?
And is that what Treasury's gonna say?
- I think you need
to read the statute really
carefully and many times.
I take David's point about
the legislative history.
As we are trying to interpret the rules,
we are looking at how
the rules were explained.
And if you look at the
example of what happens
with GILTI in the legislative
history they clearly have put
the GILTI gross ups in the GILTI basket.
I think we have a lot of leeway
in terms of 904D3 which
are rules that will inform
how this should be made
to the GILTI gross up in the GILTI basket,
the gross up in the GILTI basket.
And I think that will be the only way
to make the rule make sense.
So yes, I think we will be looking
to see that we have the authority
to say that the GILTI gross
up is in the GILTI basket.
But I appreciate the point
that a read of the statute does
not get one there.
- And what implication does that hold
for other expenses that under
the prior regime were subject
to look through, like inter-company
royalties, inter-company interests?
904D3 says they're not
in the passive basket.
They're only in the passive basket
to the extent allocable to passive income.
It doesn't say anything
about the GILTI basket.
- That's right.
So look through isn't working
quite like it worked before, right.
Look through used to be
we're gonna put people
on parity, like whether
you earn it in a sub
or whether you earn it
in the United States.
It should be in the same basket.
And also look through
in many ways was there
to incentivize people to
reduce their foreign taxes.
If you drive down your foreign tax
by making a deductible payment
to the US, we're gonna
match the basket for you
and not make it passive.
I think that we need
to make the fundamental
decision of whether
or not tested income at the CFC level is
in the 951 cafe basket.
Many people would hope
no until they think about look through.
If we think that in fact the 951 cap a
basket is replicated with the c level
then I think it would follow that a
deductible payment we would say
if it's reducing the
951A income it should end
up being in the GILTI basket
up at the US shareholder level.
On the other hand, if we
say no that's not right.
That's not how it works.
Tested income is tested income.
It's not 951 cap a.
Then I think it would lead
to a different result.
And I'm sorry, I'm not
here to reveal which.
(Paul laughs)
- We're all waiting
with baited breath for--
- But.
- So close, so close.
- How many more months should we expect--
- I mean, that guidance will
have to come out this year,
because people are gonna
need to start filing returns.
And it's a fundamental question.
- Right.
Okay, so now that we
have a lack of clarity
on what is in each basket, we can talk
about how we're allocating expenses
to those baskets which is kinda tough
when you don't know
what income is in them.
- But you'll at least know
the GILTI inclusion's in the basket.
- Fair enough, fair enough, fair enough.
Now on this slide we talk
about how the conference
report which is probably
the most cited provision
in the conference report
states that if you're paying
a foreign tax rate of 13.125,
you shouldn't owe any GILTI tax.
And, I mean, if we're allocating expenses
to the GILTI basket, there's a pretty good
argument that that statement is incorrect.
Although as David pointed out,
technically what's happening is
you're disallowing a deduction
for that expense in substance.
And so you could argue
that's not inconsistent.
But it does seem to be
fundamentally inconsistent
with the general statement.
That said there is nothing
in the statute that tells you
you don't allocate expenses.
And indeed as David
pointed out section 904B5
strongly suggests some
expenses are allocated.
So Marjie I'm assuming
that you are busy working
on how to allocate expenses, not whether
to allocate expenses, but
delighted if I'm wrong in that.
- No, I think of this statement.
Unlike the example they
gave that there's no
way to interpret it other
than the GILTI gross up is
in the GILTI basket.
I think this statement, like
a foreign book that said prior
to 2018, hey the US rate's 35.
As long as you don't pay more than
35% tax overseas you
should get a full credit.
Well that's not true, 'cause
you have to allocate expenses.
And it's difficult to reconcile
that other than saying
this is a shorthand for how
international tax works.
But when they've added it as a basket
under 904D, and they
have the 904B5 statement
it seems clear to me
that they were expecting,
the statute expects that
we will allocate expenses.
- Okay, so let's dive into the three
specific expenses that are
substantial first interest.
864E which is the interest
allocation provision that goes
back to the '86 act was not changed.
Instead they adopted a
new section, section 904B5
which was kind of hidden in the act,
because it came in as
a conforming amendment
to the provision adopting
section 245 cap a
rather than coming in in the
foreign tax credit provisions.
But basically, what 904B5
says is that you disregard
any expense that otherwise
would be allocable
to foreign income or to stock.
To the extent of CFC earnings
that are neither includible
under section 951A or section 951 cap a,
so non-sub-part F, non-GILTI earnings.
So that seems to be proportionate
amount that is not taken into account.
Now that's really interesting,
because it's not saying
that you don't allocate
the expense to the sub-part F income
or to the GILTI income,
rather you allocate it to something else.
You just don't allocate it at all.
And so for example if you have
some expense that would
be allocated partly
to the GILTI basket but
partly not allocated
under this formula, then that
doesn't mean that expense goes
in the general limitation
basket or in the passive basket.
It's just not allocated.
And that is helpful.
The bad news is the way the
statute reads is that you have
to add that amount back
to the denominator of
your 904 basket fraction.
The concept apparently was that
you're gonna treat that
expense that's allocable
to the non-sub-part F,
non-GILTI income as if
it were disallowed in doing
your foreign tax credit calculation.
So therefore the denominator,
your 904 fraction
should be bigger than it really is.
It's bigger than your
worldwide taxable income
by that amount even though
your worldwide tax of course,
was reduced by that deduction.
So that really makes your
basic foreign tax credit formula not work.
I mean, when all of us who have taught
international tax teach 904 you say look
the basic calculation
for folks that don't have
domestic losses, that are
just ordinary bread-and-butter
situations is you take your
foreign basket of income reduced
by expenses and multiply
it by the tax rate.
And that's the amount that you get.
But with that denominator
increase that's wrong.
You will never get that number.
That will be too big a number.
The foreign tax credit's gonna be reduced
by the expansion of the denominator.
I think that was a mistake.
I'm told by people on the hill
that that was intentional.
So it was an intentional
mistake maybe, but.
- Policy, policy.
- Yeah right, right.
But nonetheless, that's
the way 904B5 is phrased.
And we have to live with it.
Now I used an example here.
I think we don't really have enough time
to work your way through it.
But the way I see it working,
and I'm not saying anybody else
in the audience needs to see it
the same way is that basically
you do your 864E calculation
first with interest.
Come up with an amount of
interest that is allocated
to CFC stock under those rules
with whatever modifications Treasury
and the Service decide to put on them.
And then you do an
apportionment under 904B5
to determine the amount that is allocable
to the sub-part F income and GILTI income.
And the rest of it, as I
say, is just thrown out.
So you come up with a 904B5 fraction.
And to me the fraction, the
denominator would be total
current earnings of that chain of CFCs.
The numerator would be the
portion of those earnings that is
not either GILTI income
or sub-part F income.
And the one question is what
about the 250 deduction.
Do you treat that as not
being GILTI income or not?
That's a huge issue.
And to my mind that's the biggest decision
within interest allocation
that Treasury has
to make and needs to make,
because if you can get
comfortable that the GILTI
amount that's taken to count
on that fraction is the amount
net of the 250 deduction,
and I think there's a technical basis
for that, then obviously
the amount of interest
income that's allocated
to the GILTI basket is significantly--
- Can you go back on the slide?
I just wanna make a quick point.
- Sure.
- I know Paul you and I
have spoken about this,
but what he's showing
on the right, the GILTI
at 40 and the QBI at 40 and
the CFC current earnings
at 80, I actually think
because QBI is not a CFC level attribute.
It is a US shareholder attribute.
A US shareholder takes
all their tested income,
all their tested losses, nets them,
and then gets this non-economic deduction
at the US level that is 10% of all
the assets of all the CFCs that
contribute to tested income.
QBI is not something that
is earned by the CFC.
And I think that when you look
at it this way you've
already drawn a conclusion
about how things would play out.
And I go back to where I think
the first decision tree is
which is is tested income
a 951 cap a type income
such that in this example all
80 is really tested income.
Now I agree with you that
the inclusion percentage
for how you access credit is gonna be
50%, that the inclusion percentage
for how you wanna know how
much PTI is gonna be 50%.
For me I need to always think
about QBI as happening at
the US shareholder level.
It's really not--
- It is happening at the
US shareholder level,
but it's not a deduction.
It is a reduction in your GILTI inclusion.
So it's a reduction in the
951 cap a, a GILTI amount.
And 904B5 refers to my
mind to that amount, not
to the tested income amount
under the rest of 951 cap a.
So it seems to me that the QBAI is exactly
what 904B5 was trying to say.
Expenses allocated to that
should just be thrown out.
Now that's just me.
But that's the way I read the--
- And the other way to sort of rephrase
this slide might be that GILTI is tested
income that was subject to US tax.
And QBI is tested income that
was not subject to US tax.
It's actually broader than QBI.
It might be FOGE.
It might be lots of other things.
- And it might be income
that's sheltered by losses.
- Right, so and it does
seem that 904B5, I think
to Paul's point, is making the distinction
between earnings within the CFC
that are immediately subject
to US tax and those that are not.
How to make all this make
sense I think is the challenge.
- I totally agree.
I don't think it means if we think of this
in this picture that
everything is really meant
to do one cap a.
I don't think that means,
'cause 951 cap a basket.
I don't think that means that
therefore none of the stock,
904B5 should apply to clearly,
if the stock isn't giving off
income that is currently taxed.
That's what 904B5 says.
If it wasn't taxed under 9041, 951A
or 951 cap a,
then those expenses
should not be allocated.
I think that's what it says.
- Maybe just one point to highlight there
and curious Paul what you think.
To the extent that you have multiple CFCs
there is kind of implied
that there's a single CFC
so you don't present this issue.
And you had one CFC that actually had all
the tangible assets, you
wouldn't necessarily say,
and let's say that at 40 of tested income
and the QBI return actually
happened to be 40 as well.
That particular CFC stock
asset wouldn't be viewed in its entirety.
It has to be kind of
spread across CFC stock.
- Well, but the CFC,
assuming we're doing this
at the US shareholder level, 904B5 I think
kinda plays each doing it with respect
to each chain of CFCs
just as GILTI applies
to each chain of can be seen to be applied
to each chain of CFCs.
And so you can mesh the two together
at the US shareholder
level, it seems to me,
in terms of what expenses
go into which basket
without having to deal with
second tier, third tier,
first tier CFC and which one has the QBAI.
I grant you there are some issues
in terms of well then what
expenses are allocated
to the passive basket.
And some of those things
have to be worked out.
But I think you can make this work,
if Treasury and the Service
decide to take that approach.
Just two other things.
And this is probably an
even more important issue
or at least an equally important issue
and that is R & D expense allocation.
I'm proud to say I lived
through 17 years of battle
on the R & D allocation
reg, starting back in 1978
and finally ending in 1995.
And I pray and hope that we
don't revisit that battle,
because that was a very
difficult and tortured experience
and one where the answer that came out
in 1995 is one that I
think people have been
reasonably comfortable
with for the last 23 years.
But there is a
question of to the
extent you are allocating
R & D expense where do you allocate it.
And I would argue particularly
with David's point
about how this bill overrode Amazon
and meant that there is
really no way you can get
intangible profits out of
the United States other than
through licensing or 367D
type transfers that whatever
basket, royalties and 367D
inclusions end up being
in is the basket that R & D
expense should be allocated
to period full-stop.
I don't know if anybody has any comment.
- So I think that again goes back
to the question of if we
think it's appropriate
for interest and royalty
to have look through put it
in the GILTI basket, then
I think that would inform
where the R & E expenses should go.
If we keep it in the general basket,
I can understand why people
would be concerned that
R & E being allocated
to GILTI when the royalty
coming back would be
in the general basket seems like
you've mismatched the expense.
But as you know the R & E regs don't
just talk about royalties.
They talk about royalties, dividends,
any income thrown off by the stock.
So it's a very--
- Right, but those regs were built
in a regime where royalties
and underlying business income
were in the same basket.
Now if royalties are gonna be
in the general basket,
you have different baskets
for foreign business income.
And so it seems to me the
matching principle of matching
income expense is that R &
D expense oughta be matched
with royalty income and
not with GILTI income.
To the extent GILTI income
is intangible income that has
to reflect the intangible
value add of the CFC itself
and not of the US parent,
because the CFC has to
pay fair market value
for what it's getting from
the parents R & D efforts.
- Right.
- One final is G&A.
G&A is a substantial allocation.
If we had gone purely territorial,
there's no way that
congress would've adopted
a provision disallowing some G&A expenses
to the extent attributable
to foreign exempt income.
They just wouldn't have done it.
No foreign country does it.
Admittedly, some of them
haircut their exemption
to take into account some of those things.
And why would you disallow deductions
for exactly the kinds of
jobs that you wanna have
in the United States?
But the expense allocation
regime does allocate
these kinds of expenses to foreign income
and presumably to GILTI income
which is gonna result
in some of those expenses
being disallowed.
I don't know if there's
any technical basis
for Treasury to avoid that result,
but certainly one would
hope they can come up
with some way to minimize it.
And it's really difficult, isn't it,
because today people allocate it
on a basis of hours or relative
time you spend or something.
And when you're talking about
the GILTI basket versus, say,
the general basket that's irrelevant,
because you have the same
income that's in essentially
in multiple baskets.
And so I don't know how the reg has
to be changed to come up with
a metric that would kind of
rationally allow you to put
some G&A slash stewardship
expenses in the GILTI basket and others
in the general limitation basket.
That's something you're gonna have to--
- And we'll have to think
about what we're gonna do
with FDII, like how do the expense
allocation rules work for that.
I mean, it's all related, right.
- Right
okay, let me turn it
over to Ron here, sorry.
- So the problems are many, right.
But ultimately people are gonna have
to figure out what to do with this regime.
And so I'm gonna talk a
little bit, pick up a point
Professor Rosenbloom raised on
the treatment of individuals
and then we'll shift
into what multinationals,
US multinationals are thinking, so.
Professor Rosenbloom
alluded to individuals got
a hard deal here in tax reform.
So just looking at the two sort of major
provisions that came out,
section 965 mandatory repatriation
applied to individuals.
And you got your deduction,
but the net effect is an inclusion
at a little bit higher
rates than sort of what
the corporates applied, a one-time event.
No foreign tax credits,
that is a general matter.
And we'll talk on the next slide
about this section 962 election.
But in general it's the
end of your deferral
you are now going to pay tax.
It kind of roughly resembles
the capital gains rate
which is kind of interesting.
But mandatory repatriation,
ending deferral for you.
GILTI comes along and
outside of the exceptions
for foreign oil and gas,
it is a worldwide regime.
And so now individuals are
subject to tax immediately.
And when you go kinda crunch
through the numbers the,
depending on how some issues play
out, the effective rate
might be really pretty high
and actually as high as
you might expect today.
So it was interesting.
Mandatory repatriation
was sort of a transition
to territorial, but it has
become sort of a transition
to worldwide, and that's much more stark
in the case of individuals
than it is for corporations.
So what can be done about that?
(mumbles) sort of breathe more life
into a relatively obscure
provision, section 962,
which allows individuals to elect
to be treated as corporations
with respect to their
sub-part F inclusions, including
their GILTI inclusions.
So the statute goes out of its way
to make sure, yeah, you can go apply 962
to your GILTI inclusions,
if you're an individual.
Two effects here.
One is treatment as a corporation
allows foreign tax credit.
So you can effectively eliminate
sort of the one level of tax
in the system, a corporate level tax
through foreign tax credits
if you are actually being
taxed abroad on the income.
The second effect here is
sort of a deferral benefit.
To the extent that
corporate taxation is now
at a lower level, and we'll talk
about 21 versus 10 1/2%, but is
at a lower level than the
highest individual rates,
to the extent you're not taking earnings
out of the CFC, you get a deferral benefit
and timing might well
matter to put it mildly.
Two big picture issues.
So 962 operates by tax
at the corporate level.
All the earnings become PTI.
To the extent you have paid
tax that PTI treatment remains.
To the extent that the earnings are
in excess of the tax paid
in the US those are earnings
that are taxed again
at the individual at individual rates.
So kind of this really quite complicated
kind of hybrid mechanism
to impose two levels
of tax for individuals.
And again, it's waiting on
distributions from the CFCs
to ultimately impose the second level.
Two big uncertainties here.
One in my no show corporate way,
I'm a no show corporation, do
I get the section 250 deduction?
As Professor Rosenbloom alluded to,
the hint has been at least,
and this is somewhat in the
965 notice has been read
to suggest that no
individuals should not get
the section 250 deduction.
That would otherwise be
available for corporations.
The interesting issue, and again it goes
to the effects of deferral
and sort of how big that
deferral benefit potentially is.
I don't know.
Marjorie do you wanna?
- It's always good to
manage expectations, right.
So I have to say I'm embarrassed.
I was thinking when you start that I was
in the library at the
end of December looking
up the BNA so I could read about 962,
'cause I didn't do a lot of
work in 962 prior to this law.
However, I think you put it well.
It's really a timing issue, right,
and it could be an important timing issue,
but as Ron has just said,
the 962 election doesn't mean
the US shareholder is only subject
to tax at the corporate rate.
It means that it's subject to tax.
It gets the corporate rate
and the dean paid credit
until the cash is distributed to them.
At which point they have
to pay the individual rate
and then subtract out
what they've already paid.
So it's to help individuals.
Legislative history
indicates (mumbles) to do
who might not be able to
force distributions out
to be able to pay the lower rate of tax
until they actually get the money.
So the question of whether
the initial tax law,
the 250 deduction or not is a timing issue
and could be an important one.
But it is a timing issue.
Most people have said that are regulations
right now say that you don't get
any deductions in calculating this.
So that would imply you
don't need a 250 deduction.
The statute itself starts with
under regulations prescribed
by secretary who presumably
we can take a look
at this and see what the
right thing to do is.
- And so the second issue that comes
up is sort of the 1H11 issue.
And this is when I make my distribution
out of the CFC should
the individual recipient,
again, subject to individual rate taxation
on this distribution, to the extent it's
in excess of the corporate level tax paid,
should they get 1H11 benefits?
Now I gather that there
is currently litigation
on this topic, and I
mean, it's interesting.
It really goes to the
nature of the corporation.
There seems to be a tension perhaps
with section 250 issue.
And so maybe that has to be resolved.
See where the litigation goes.
And then maybe that will
kind of inform the answer
one way or the other.
So two large areas of uncertainty that are
just kind of playing out.
This is on the mechanics.
In the interests of
time, I will skip that.
And we will jump to US multinationals,
and what do you do in this regime?
So it's interesting.
So we're focusing here on GILTI,
and it is the sort of catchall, right.
If you have foreign subsidiary earnings,
whatever's not sort of in
anything else will be subject
to this 10 1/2% rate.
It's interesting when you compare it.
The complexity of this is
a lot greater, perhaps,
than it was under pre-tax reform.
They're now sort of seven ways
to earn a dollar in foreign markets.
And so GILTI's the catchall.
What you'd really like
to be is 245 cap a, get
true territoriality.
I'm not subject to tax.
I can take a dividend back up
to the US without residual tax.
But that is largely out of your control.
It is kind of hard to
naturally sort of get in there,
and it's a relatively narrow class except
for oil and gas.
And so then it's sort of well looking
at all these other options
can I get out of GILTI
and into these other options?
Does that make sense to me?
And the effective tax rate in
for a tax credit consequences make
each of these different sort
of buckets much different.
So what are the sort of choices?
Broken this down to sort
of three simple paradigms.
On the left it's I'm gonna
go keep my CFC group.
Now why might this make sense?
You might be low tax
overseas kind of naturally.
That's probably getting harder
to do in the BEPS environment.
But maybe you're low enough
tax that the foreign tax credit
issues, test and loss issues,
so the two big areas of problems
with the GILTI regime we've
kind of discussed here, tested
losses not being favored,
interest expense allocation being
complicated and resulting in a 21% tax.
Maybe I just don't care about it.
On the other hand, maybe
I am high-tax overseas.
We looked at the list of
GILTI at the beginning
and Pat pointed out that an exception
from GILTI is high-tax sub-part F income.
Interesting animal, post-tax
reform, high-tax sub-part F
income is now 18.9%.
That's the magic rate to get
out of sub-part F inclusion.
And if I'm high-tax sub-part
F, I'm out of GILTI,
out of GILTI, out of sub-part F.
I am territorial.
So high-tax sub-part F income is like
this magic true territoriality.
The 18.9%, that calculation doesn't care
about interest expense.
It doesn't look to what's happening
up at the US shareholder level.
It just asks look at my CFC level.
Let's look at the items of income.
Are they subject?
I have to look at that
from a US tax perspective,
but is there 18.9% effective
tax rate being imposed
by the foreign jurisdiction?
So I can get to territoriality
and I don't have
to go worry about tested losses.
I don't have to go worry about
interest expense allocation.
That seems like a pretty good result.
Very strange to have turned
50 years of usual on its head.
Now maybe getting into sub-part
F income is a good thing
if I'm otherwise naturally subject
to a high enough rate of tax offshore.
Something people are
gonna have to think about.
I think it's gonna be a cultural issue
sort of within the service of sub-part F,
taxpayers might not be
viewing it as a bad.
It might be a good.
And are you playing offense
and defense as a tax administrator?
- Yeah, all of a sudden
no one's gonna be arguing
with us about the note of
2017-13, substantial assistance.
You're right we had a problem.
And no one's gonna be arguing
with us that they are
substantial contributors.
Yeah, those five people
really weren't doing enough.
I don't know why we thought
it wasn't some part of--
- Big change Marj, it's a big change.
- But Ron you're just not
old enough to remember.
Back in 1987 when the service
first clarified that
954B4 was an elective rule
and not a mandatory rule.
It was something that
folks utilized back then
to bring back excess credit.
- In a lot of ways--
- So in many ways with a GILTI basket
we're back in 1989 basically.
- I think that's absolutely right.
So the middle column is...
I'm okay on expense allocation
or I'm just gonna go fight those battles.
But I'm gonna get rid
of my tested loss issue.
I'm gonna make my GILTI
calculation as simple as possible.
And we've called this sort
of super holdco structure.
So you have a single
or perhaps it's a consolidated group base,
but single US shareholder, single CFC.
Everything below the CFC
is disregarded entities.
Everything just flows up.
And I'm gonna go figure
out expense allocation
and do the best I can there.
At least I've sort of
made my GILTI calculation
as simple and straightforward.
And I've avoided the tested loss issues.
Certainly a possibility that
would need to be weighed.
The far right is sort of the, well,
I'm just gonna go back on shore.
Perhaps I can structure
it to the FIDI rate.
At least I get foreign branch income,
and I get foreign tax
credits over 10 years.
And I can have some sort of averaging.
I'm not in the use or
lose GILTI tax system.
Let's just liquidate everything
and bring it back onshore.
And I don't know about
many companies will do
this sort of wholesale, but
it certainly might make sense
in some instances with respect
to some foreign operations
that exist today.
There is probably a large
Hotel California effect.
Once you've come back into the US,
if the political winds turn
and rates start to creep up
and FIDI goes away for whatever reasons,
I might not be able to
reverse this all that easily
or all that tax efficiently.
And so a lot of modeling, seeing what
to do calculation will have to go into it.
Just in thinking through
the options it really is
an exercise in know thyself.
And you have to understand
how am I being taxed
and what is my forecast
for taxation offshore.
Onshore what attributes, mostly
foreign tax credit attributes have
I brought into the post-tax reform era.
What kind of income am
I generating offshore.
And then you start
to understand what
attributes you're trying
to maximize and utilize.
And then you go back to the three options
and look at your (mumbles) chart
and how easy is it to get there.
What are foreign jurisdictions
gonna think about it?
A very complex process I thinK to move
to sort of the post-US tax reform
and really the post-BEPS era
on the taxation of US multi-nationals,
and in many ways it's a dynamic
process that will unfold over years.
I mean, I think with that
we are just over time.
Wanna just kick it to questions?
- Just one quick add on,
and I think you said this as
well for the branch structure.
But those three options,
it's not like you choose
one structure for your
offshore operations.
You may have a super holdco structure
for some of your operations.
You may have multi-tiered structure.
And you may have branches.
You may have all three.
- Yeah, very much, it
might be a mix and match,
but lot to do to make
those evaluations I think.
Questions?
All right.
- There's one over here.
- [Male In Audience] On your chart,
seven ways to make a non-US dollar.
Can you pull that up please?
- Sure.
- [Male In Audience] It seems
to me that if you've got
active income abroad
that the first column is
clearly the most beneficial
and that even if you get hit
with GILTI, it's most beneficial.
And even if you're considering investing
in the US so you can get FDII,
it's still not as beneficial
as the territorial system.
Am I reading that correctly?
- I think the issue is
just that the bucket of
sort of naturally existing
245A income, so 0% tax.
All you're doing is paying
whatever you're paying foreign.
It is just sort of QBI basically.
I mean that's sort of the natural bucket
unless you're oil and gas.
And oil and gas, for that
industry it's a separate issue.
But broadly the only thing is
this ordinary return on tangible
assets and so 10% of bases.
That's not a real robust thing.
And otherwise everything
above that amount is going
into GILTI, and you're at 10 1/2%
with foreign tax credit
issues associated with it, so.
- David wants to weigh in.
(faintly speaking)
- So David's raising the point
of exempt income includes
income sheltered by losses.
It's actually interesting
how you think about that.
I mean, I view it as sort
of a group CFC thing.
And so if I have losses and
gains, like I didn't really have
income on a CFC level basis,
and so I'm not really...
It is a sort of separate
box accounting issue.
But the creation of exempt income,
I mean, I had an economic loss presumably
or at least a tax loss that
generated my exempt income.
And so it is more of
a tax accounting thing
than QBI which I think is a
exemption for economic earnings.
- [Male In Audience] Thank you.
So I know--
- He's got one more.
Oh there he is.
- [Male In Audience] I know
you guys briefly touched
on GILTI PTI, and I know
one issue that we're looking
at is PTI ordering rules.
If we think that going forward, any
distributions that we may have will come
out of GILTI PTI first.
And then anything left will be come
out of transition to ax PTI.
Do you guys have a sense
of if you think that's how
when guidance does come
out, do you think that's how
it's gonna work out
or do you think we'll
be able to take our PTI
to have transition tax first
than anything else will be out of GILTI?
- It will be what Marjie tells us
at the end of the day.
(faintly speaking)
- Right, I mean, presumably,
you're saying that because
in general PTI is kind of a lipo approach.
And so you would think that
GILTI is your most recent layer
so that it would come out.
I mean, one of the 965 notices talked
about at least with respect
to some PTI that the IRS
might issue some guidance.
So, Marjorie I don't know
if you wanna tackle--
- Yeah I mean, and if you
look at what happened in '86.
This was addressed right away.
I know this is important to people,
because people want to possibly hedge
against their PTI literally
because of 986 seagate or loss.
So it will those ends.
And I guess it could be
that people are pulling
stuff out right now and it's
a problem they don't know.
But that will be addressed this year.
- Okay, well thank you very
much Pat, Paul, Ron, and Marjie.
With that coffee and
refreshments are now available
across the hall in Greenberg Lounge,
and I encourage you to come back promptly
for the 10 30 program that will focus
on FDII and the B, thank you very much.
