The Tax Cuts and Jobs Act proposes the most significant
changes in US tax law in more than three decades.
The 'Act' at this point is only two bills: the House bill
was approved by the House and the Senate bill was approved by
the Senate. A conference committee will need to reconcile
While the language and provisions of the final bill are not
certain at this time, we thought it would be helpful to discuss
some of the financing provisions that can affect inbound
Interest deductions of a US corporation would generally be
limited to 30% of the taxpayer's adjusted taxable income plus
any business interest income under amended § 163(j) rules.
The 30% interest deduction cap applies to all interest
deductions, not just related-party interest.
Under new § 163(n) in the Tax Cuts and Jobs Act, a US
corporation's interest deduction relative to the worldwide
group's interest deduction could be no greater than 110% of the
US corporation's earnings before interest, taxes, depreciation,
and amortisation (EBITDA) relative to the worldwide group's
EBITDA. In other words, a US corporation's interest deductions
would generally be restricted if it were more highly leveraged
relative to the rest of the worldwide group. The EBITDA of US
corporations includes the EBITDA of any disregarded entities,
but generally does not include any distributions received from
The Senate proposal reduces interest deduction to the
product of the net interest expense multiplied by the
debt-to-equity differential percentage of the worldwide
affiliated group. The asset amounts taken into account in the
equity calculation are based on the assets' adjusted bases.
Section 163(n) would apply to corporations that file
consolidated financial statements that include at least one US
corporation, one foreign corporation, and report annual gross
receipts in excess of $100 million.
When both the new § 163(j) and the new § 163(n)
interest limitations apply, the one that results in the greater
disallowance would take precedence.
The Senate proposal also would require "applicable
taxpayers" to pay a minimum tax of 10% of "modified taxable
income", i.e. taxable income computed without deducting "base
erosion payments" or the "base erosion percentage" of net
operating loss carryovers. An applicable taxpayer would mean a
taxpayer with at least $500 million of annual average gross
receipts and a base erosion percentage of at least 4%.
A base erosion payment would mean any amount that is paid or
accrued to a related foreign person (with "relatedness" broadly
defined) and for which a deduction is allowable (interest,
royalties, services, etc.), including any amount paid or
accrued in connection with depreciable or amortisable
The House bill's version of this provision is an excise tax
on such payments, which seems less likely to be enacted.
The new § 267A provides that no deduction is allowed
for amounts paid or accrued to a related party in hybrid
transactions or with hybrid entities.
In another change, Grecian Magnesite Mining v.
Commissioner, 149 T.C. No. 3 (2017), would be overturned
prospectively by a statutory change. It dealt with a foreign
partner's sale of its partnership interest in a partnership
that is engaged in a US business. It would be enforced by
subjecting the buyer to a withholding tax.
Jim Fuller (email@example.com)
and David Forst (firstname.lastname@example.org)
Fenwick & West