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McDermott's Take on

Tax Reform

McDermott partners with our clients to design strategies that are both creative and sound to effectively plan for long-term business success. Through our resource center, our team continues to provide critical guidance to optimize the opportunities and navigate the risks brought about by tax reform legislation. Subscribe to stay on top of McDermott’s latest take on tax.

IN THE NEWS

Our tax team is primed to offer insights and analysis on what to expect from Tax Reform 2.0.

McDermott tax partner Dave Noren draws from his past experience on the Hill to serve as a resource for those trying to anticipate how “Tax Reform 2.0” may unfold in terms of the legislative process and the difficultly of squaring the underlying numbers. Dave shared his insights with Reuters in “House Republicans target more tax cuts as elections near.” If a proposed second round of tax cuts makes individual tax cuts permanent, but scales back or eliminates the SALT deduction cap, the amount added to the deficit could rise, “If this were likely to be enacted in the near term, those numbers would be difficult to square.”

David G. Noren, Tax Partner

InSights

Check out our updates on significant developments.

Selling CFC Stock: A Buyer’s Section 338 Election Can Be Beneficial
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Proposed Regulations under Section 956 Provide Benefits for Corporate Taxpayers
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Government Revises Base Difference Rules in New Foreign Tax Credit Regulations
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IRS Issues Final Regulations Concerning Withholding on Partnership Interest Transfers
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Government Releases Final Foreign Tax Credit Regulations on Stewardship and R&E Expenses
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Government Releases Second Tranche of Final Regulations on BEAT
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Forecast on tax

Our seasoned tax lawyers examine the various impact of tax reform and explore actions you can take.

Stephen Ryan and David Noren discuss possible prospects for further legislation as we approach the first anniversary of the 2017 tax reform legislation.

 

For more information about our Government Strategies capabilities, visit our Legislative Insights page.

Perspectives

Go deeper with our analysis on a range of provisions and their impact.

International

Final Section 468A Regulations Issued at Last

 

IRS Issues Proposed Regulations Intended to Clarify Carried Interest Rules


New Proposed Regulations Would Revise the Application of Section 163(j) to CFCs


Elective GILTI Exclusion for High-Taxed GILTI


The GILTI High-Tax Exclusion and the Tested Unit Standard: New Administrative Burdens Await for Taxpayers


Proposed Regulations Would Conform Subpart F High-Tax Exception to GILTI High-Tax Exception

 

Government Releases Final Regulations on FDII and GILTI Deduction

 

Burdensome Documentation Requirements Modified Under the Final Section 250 Regulations

 

Proposed Regulations Under Sections 863(B) and 865(E)(2) Revise the Rules for Sourcing Income 


2019 Extension of Renewable Energy Incentives


Final and Proposed BEAT Regulations Provide Some Relief


Top 10 Things You Need to Know About DAC6


Bloomberg Tax: Prop. GILTI Regs: ‘Tested Income’


Taxation of Foreign Branches after Tax Reform

 

Section 163(j) Interest Expense Limitation


Expansion of Subpart F under the Tax Reform Act

 

The New Deduction for Foreign-Derived Intangible Income


Bloomberg BNA Daily Tax Report: Tax Reform & Taxation of Income of CFCs


The New Base Erosion Minimum Tax

 

GILTI Rules Particularly Onerous for Non-C Corporation CFC Shareholders

GILTI Rule

State & Local Taxes

Illinois Captive Insurance Regulatory and Tax Reform

 

Cryptocurrencies & State Tax: Transactions with Virtual Currency


Oregon Bars Use of Three Factor Apportionment Formula

 

New York’s Response to Federal Tax Reform: Charitable Contributions Credit


New York’s Response to Federal Tax Reform: Optional Payroll Tax

Employee Benefits

Congress Offers a Glimmer of Hope for Taxpayers with Section 965 Transition Tax Overpayment


Fringe Benefits: What Tax Reform Means to the Employer


Changes for Retirement Plans

Corporate & Finance

Treasury Provides Additional Guidance on Opportunity Zone Provisions

 

Guidance in Proposed Regulations Expected to Jumpstart the Benefits of Qualified Opportunity Zone Investing

 

The Impact of Tax Reform on Private Equity and M&A Transactions

Tax-Exempt Organizations

Top Takeaways for Tax-Exempts from IRS Guidance on Executive Compensation

 

Nonprofit/For-Profit Conversion Strategies: A Checklist for the General Counsel

 

Tax Reform Bill Becomes Law: Lessons for Tax-Exempt Organizations

Trusts & Estates

Changes to Estate Gift and Generation Skipping Taxes

Click here for additional McDermott Publications.

Insights

Check out our analysis on a range of provisions and their impact. 

Senate Proposal Includes Comprehensive Business Tax Reform

Bloomberg BNA Daily Tax Report: Tax Reform & Taxation of Income of CFCs

The New Base Erosion Minimum Tax

Bloomberg BNA Daily Tax Report: Changes to CFC Definition

Fringe Benefits: What Tax Reform Means to the Employer

The Impact of Tax Reform on Finance

The Impact of Tax Reform on Private Equity and M&A Transactions

Changes for Retirement Plans

Changes to Estate Gift and Generation Skipping Taxes

The Final Tax Reform Act: SALT Implications

State Tax Implications of the Repatriation Transition Tax and the GILTI

Tax Reform Bill Becomes Law: Lessons for Tax-Exempt Organizations

Tax Reform Update: Insurance Provisions – Spotlight on Property & Casualty Insurers

Click here for additional McDermott publications.

By the Numbers

What do you need to know to navigate the new global intangible low taxed income (GILTI) and base erosion and anti-abuse tax (BEAT) regimes? Click each topic below for more details.

GILTI: 10 THINGS TO KNOW

1. Current Income Inclusion
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2. Computed on an Aggregate Basis at US Shareholder Level
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3. Partial Credit for Taxes Paid on GILTI
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4. CFC with Tested Loss
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5. Section 78 Gross Up
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6. 50% Deduction
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7. No Residual US Tax if Foreign ETR of 13.125% or Higher
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8. Expense Allocation Rules
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9. GILTI creates PTI
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10. Non-C Corporation Shareholders Treated More Harshly
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BEAT: 10 THINGS TO KNOW

1. Threshold Requirements
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2. Cliff Impact
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3. Operates Similar to AMT
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4. Outbound Service Payment as Base Erosion Payments
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5. Restructure Payment Streams
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6. Cost of Goods Sold Generally Not Base Erosion Payment
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7. Derivatives Payments as Base Erosion Payments
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8. Deductions for Depreciation & Amortization Considered Base Erosion Payments
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9. Domestic Corporations with Significant FTCs May Lose Benefit of FTCs
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10. Check the Box on Foreign Corporations receiving Base Erosion Payments
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TIMELINE

Tax Reform: How We Got Here and What's Next

State & Local SPOTLIGHT

STAR Partnership's
Priority Action States

McDermott partnered with MultiState Associates to form the State Taxes After Reform (STAR) Partnership, a coalition of companies and industry trade organizations dedicated to proactively addressing state tax issues raised by federal tax reform. The coalition has drafted policy recommendations and bill-specific positions for most states. 

 

For more information on the STAR Partnership and to access state-specific resources, click here.

Policy Recommendations and Bill-Specific Positions

Hawaii SB 2821
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Kansas HB 2228
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Kansas HB 2794
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Alaska HB 399
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Iowa SF 2383
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Maine LD 1655
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Maryland HB 875/SB 733
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Maryland HB 1322/SB 166
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South Carolina H. 5162
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Tennessee HB 1689/SB 1672
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International spotlight

Take a deep dive into international impacts of tax reform with the latest issue of McDermott’s International News. 

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GILTI AS CHARGED: THE NEW RULES FOR NONCORPORATE US SHAREHOLDERS

DIGITAL ECONOMY TAXATION

PECULIARITIES IN THE US TAX TREATMENT OF CROSS-BORDER SERVICES

TAXING TOKENS

McDermott partners with our clients to design strategies that are both creative and sound to effectively plan for long-term business success. Through our resource center, our team continues to provide critical guidance to optimize the opportunities and navigate the risks brought about by tax reform legislation. Subscribe to stay on top of McDermott’s latest take on tax.

 

"It is a top-notch firm that is particularly good at understanding the policies behind new law, applying the new law to our facts when necessary and providing logical and practical solutions."

— Client, Chambers USA 2017

EVENTS

Join our thought leaders in-person to stay in the know on tax reform and other hot topics.

Mrs Robinson
Mrs Robinson

2018 McDermott Tax Symposium Resources

Tax Reform: Planning Strategies & Opportunities

Access resources and video highlights from McDermott’s 2018 Tax Symposium.

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Blogs

Tax Controversy 360

Inside SALT

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Identify, understand and educate your leadership team about the key elements of the legislation.

Tax Reform: How We Got Here and What's Next

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Current Income Inclusion

GILTI is a current income inclusion regime that is similar to subpart F income (which still lives on), but applies to all CFC income that is not subpart F income (or ECI) in excess of a 10% return on depreciable tangible business assets (QBAI).

Computed on an Aggregate Basis at US Shareholder Level

GILTI is computed at the US Shareholder level on an aggregate basis for all CFCs owned by the US shareholder.

Partial Credit for Taxes Paid on GILTI

FTC allowed equal to 80% of foreign taxes paid by CFCs with tested income. Foreign taxes paid by CFCs with tested income go into separate FTC limitation category and no carryover is allowed for unused FTCs.

CFC with Tested Loss

If a CFC has a tested loss, the foreign taxes of that CFC are not creditable and the return on tangible business assets (QBAI) of that CFC are excluded from GILTI computation.

Section 78 Gross Up

US shareholder is deemed to receive as a deemed dividend 100% of foreign taxes deemed paid with respect to tested income (not 80%).

50% Deduction

A deduction of up to 50% (of GILTI plus section 78 gross up) is generally allowed (reduced to 37.5% in 2026), which may reduce effective US tax rate on GILTI to 10.5%. If US group has a current overall loss (after taking into account FDII and GILTI), no 50% deduction (and FTCs on GILTI are lost).

No Residual US Tax if Foreign ETR of 13.125% or Higher

As a result of 50% deduction for GILTI and 80% FTC, it has been stated that corporate shareholders with ETR of at least 13.125% may be “exempt” from GILTI. As discussed below, this is not entirely true.

Expense Allocation Rules

Expenses allocated to the GILTI FTC basket reduce the FTC limitation for GILTI and generally result in GILTI being subject to US tax even if the foreign effective tax rate exceeds 13.125%.

GILTI creates PTI

All of a CFC’s earnings that are taken into account for purposes of the GILTI computation (i.e., all earnings that are not otherwise Subpart F or ECI or high taxed income) even if not subject to U.S. tax because of FTCs are treated as PTI.

Non-C Corporation Shareholders Treated More Harshly

Businesses that are not C corporations, as well as individual taxpayers that are CFC shareholders, are ineligible for the 50% deduction and may be ineligible for FTCs against liability for GILTI (unless they make an election under section 962 or interpose a domestic corporation) resulting in much higher effective tax rate on GILTI.

Threshold Requirements

BEAT applies to US corporations that (1) have average annual US gross receipts for the last 3 years of at least $500M, and (2) have made related-party deductible payments (“base erosion payments”) totaling at least 3% of the US corporation’s total annual deductions (see page 1 of Form 1120).

Cliff Impact

If a US corporation reaches the 3% threshold, all of its base erosion payments are considered for purposes of computing the BEAT, not just the initial dollar base erosion payment that pushes the company over the 3% threshold.

Operates Similar to AMT

The additional tax imposed by BEAT is determined by adding back to adjusted taxable income all Base Erosion Payments for the year to arrive at “modified taxable income.” The BEAT is the excess of 10% of the modified taxable income over the taxpayer’s regular tax liability for the year (net of FTCs and general business credits allowed with the exception of R&D credits).

Outbound Service Payment as Base Erosion Payments

As a general rule, base erosion payments include payments for services. There is a limited exception that applies if the service payments meet the requirements for eligibility for SCM method, determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure, and such amount constitutes total services cost with no mark-up. Controversy around whether this means entire cost plus amount is base erosion payment or only “plus” amount.

Restructure Payment Streams

Common for US-based multinationals to reimburse foreign affiliates on a cost-plus basis for payments made to foreign vendors. Can avoid the base erosion payment for services by having direct service contracts between US parent and foreign unrelated vendors. Note that with respect to restructuring payment streams, Treasury has broad authority to issue regulations to prevent the avoidance of BEAT, including through the use of unrelated foreign persons.

Cost of Goods Sold Generally Not Base Erosion Payment

Base erosion payments do not include cost of goods sold (except in situations involving expatriated entity) so US resale company is less likely to be affected by BEAT than a US company that pays for services. Consider having base erosion payments like royalties for right to use trademark included in cost of goods sold to reduce base erosion payments.

Derivatives Payments as Base Erosion Payments

Base erosion payments include derivative payments unless the derivative payment is a “qualified derivative payment” (i.e., treated as ordinary income and recognized annually under mark to market rules). This could impact US hedge centers for example.

Deductions for Depreciation and Amortization Considered Base Erosion Payments

Base erosion payments include depreciation and amortization deduction from property acquired by US corporations from related foreign persons in taxable years beginning after December 31, 2017.

Domestic Corporations with Significant FTCs May Lose Benefit of FTCs

If a US corporate taxpayer has $2B of modified taxable income (10% of which would be $200M) and has $30M of FTCs which reduce the taxpayer’s $210M regular tax liability to $180M, the BEAT would be imposed on $20M ($200M - $180M), which effectively has the result of denying a credit for 2/3 (or $20M) of the FTCs.

Check the Box on Foreign Corporations receiving Base Erosion Payments

In certain circumstances may make sense to treat certain foreign corporations as DEs of the US corporate parent to reduce the amount of Base Erosion Payments. All of the foreign tax credits of the DEs would be useable by the US parent (in a separate branch tax basket).

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