IRS Notice 2018-28: Section 163(j)

The IRS issued Notice 2018-28 (the “Notice”) stating that the IRS will issue regulations providing additional guidance related to the amended section 163(j).  Before the issuance of the regulations, taxpayer may rely on the rules described in the Notice.

The amended 163(j) disallows a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income. There is an exception to this limitation that applies to taxpayers with average annual gross receipts for the three taxable year period ending with the prior tax year that do not exceed $25 million.  In applying the rule in practice, there were many areas requiring additional clarifications and guidance, and the following are some of the issues addressed in the Notice:

Section 5 of the Notice clarifies that the limitation under section 163(j) is intended to be applied at the level of the consolidated group.  In other words, a consolidated group’s taxable income for purposes of calculation adjusted taxable income will be its consolidated taxable income, and intercompany obligations will be disregarded for purposes of determining the limitation in section 163(j)(1).

Section 6 of the Notice clarifies that the limitation under section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.

Section 3 of the Notice clarifies that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017.

Please click on the link below to view the Notice 2018-28.

https://www.irs.gov/pub/irs-drop/n-18-28.pdf

연방세율 인하에 따른 캘리포니아 세율 인상?

연방세율이 21%로 인하되는 것에 대해서, Kevin McCarty와 Phil Ting 캘리포니아 민주당 하원의원들은 캘리포니아 한계세율을 기존 8.84%에서 18.84%로 인상하는ACA-22안을 내 놓았다. 이 법안에 따르면, 2018년 1월 1일 이후에 시작되는 과세연도에 1백만불 이상의 법인소득에 10%의 추가 세금이 부여되게 된다.

두 하원의원은 지난 연방세법개혁안은 중산층이 아닌, 백만장자들에게만 혜택을 주는 법안이며, 일반 캘리포니아 납세자들에게 이러한 기업들의 경제적 이득을 나누어 주기 위해서 ACA-22를 준비했다고 밝혔다.

이 법안이 통과된다면, 캘리포니아 주 내에 있는 법인들이 다른 주로 사업을 옮긴다거나, 법인들이 캘리포니아 내에 추가로 투자하기를 꺼려하게 만들것으로 예상된다. 이러한 이유로, 캘리포니아는 민주당이 강세를 띄지만 ACA-22는 통과되기는 어려울 것으로 전망된다. 법안이 실질적으로 효력을 얻기 위해서는, 이 법안은 상하원에서 동의를 받아야 하며, 그 후에 추가로 투표에 따라 통과가 되어야 한다.

자세한 내용은 아래의 링크를 참조하기 바란다:
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22

California Democrats’ Reaction to Federal Corporate Rate Reduction

In response to the federal corporate tax rate reduction to 21%, two Democratic assemblymen, Kevin McCarty and Phil Ting, introduced Assembly Constitutional Amendment 22 (“ACA-22”) that would impose a 10% surcharge on qualified corporate net income over $1,000,000 effective for taxable years beginning on or after January 1, 2018.  This bill, if enacted, will effectively increase marginal California corporate tax rate from 8.84% to 18.84%.

McCarty and Ting believe that the recently enacted federal tax laws, including corporate tax rate reduction, favors billionaires over middle-class workers, and they are introducing ACA-22 to share with ordinary California taxpayers the economic gains provided by federal income tax cuts for corporations.

The 10% surcharge is believed to cause some businesses to migrate out of the state and companies might be less inclined to make investment in the state.  For these reasons, despite the fact that California is a liberal state, ACA-22 faces an uphill battle.  To be signed into law, the bill must be approved in both houses of Legislature and, if passed, would also need voter approval.

For the reference, here is a link to ACA-22.
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180ACA22

GILTI & BEAT in Plain Language

There are two provisions contained in the Tax Cuts and Jobs Act which may have unwary impact to multinational businesses effective for a tax year starting after December 31, 2017.  These two provisions were given fancy names and the rules are extremely complex.  One is Global Intangible Low Taxed Income (“GILTI”), enacted to keep the earnings deemed associated with U.S. intangibles within the United States.  The other one is Base Erosion and Anti-Abuse Tax (“BEAT”), designed to minimize tax revenue loss resulting from payments to foreign related parties by their affiliated U.S. companies.

We will try to explain these two overly complex tax rules in a plain language so that even those with little or no tax background may understand how the rules work and may impact their associated business.

Global Intangible Low Taxed Income

GILTI applies to U.S. shareholders of a controlled foreign corporations (“CFC”).  Its intention is to include CFC’s income in excess of its ‘routine income’ in the U.S. shareholders’ taxable income.  In a nutshell, every year, U.S. shareholders of CFCs are required to test if the CFC generated income in excess of its routine income and the excess income are included in the U.S. shareholders’ taxable income.  The routine income is artificially set at 10% of CFC’s investment in depreciable assets – tangible assets.  Income in excess of the routine income is considered as earnings attributable to U.S. intangibles.  In computing taxable income, U.S. shareholders are allowed deduction equal to 50% of GILTI for the tax years from 2018 through 2025 and 35% of GILTI from taxable years after 2025.

Illustration:

X is a U.S. taxpayer who owns 80% of a foreign company, Y.  During the calendar year 2018, Y generated $1,000,000 of income.  Y has an average balance of depreciable assets in the amount of $2,000,000 for the year.  X is required to include $300,000 of income in his/her tax return for the year.

Takeaway is U.S. shareholders of a CFC with high income relative to its investment in hard assets should consult with their tax consultants to assess the potential impact of GILTI tax provision contained in the Tax Cuts and Jobs Act.

Base Erosion & Anti-Abuse Tax

BEAT applies to U.S. companies with relatively large outbound payments (paid or incurred) to its foreign related parties.  Generally, any outbound payments resulting in U.S. tax deductions, depreciation and amortization (with exceptions for inventory purchase and service cost reimbursements) are considered as base erosion payments and they are disregarded in computing an alternative taxable income (referred as “modified taxable income”).

U.S. companies are required to compute the modified taxable income and compute alternative tax at 10% (5% for the tax year 2018).  U.S. companies’ tax liability for a tax year is higher of the regular tax or the alternative tax computed without base erosion payments.

BEAT provision applies to affiliated group with U.S. source gross income in excess of $500 million and base erosion payments account for 3% or more of the total U.S. deductions.

Illustration:

X, a U.S. corporation, has $10,000,000 taxable income for 2019 tax year, which includes $25,000,000 royalty payment to its foreign parent company and $5,000,000 depreciation deduction on machineries acquired from its foreign related party.  (For purpose of the illustrations, we will assume that there is no withholding tax).  X is subject to BEAT minimum tax of $1,900,000, in addition to the regular tax of $2,100,000.

Takeaway is U.S. companies with considerably large base erosion payments to foreign related parties should consult with their tax consultants to assess the potential impact of BEAT provision contained in the Tax Cuts and Jobs Act.

THE INFORMATION CONTAINED HEREIN IS OF A GENERAL NATURE AND BASED ON AUTHORITIES THAT ARE SUBJECT TO CHANGE AND DIFFERING INTERPRETATION.  APPLICABILITY OF THE INFORMATION TO SPECIFIC SITUATIONS SHOULD BE DETERMINED THROUGH CONSULTATION WITH YOUR TAX ADVISER.  ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED TO BE USED AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.