US Inbound: Tax Cuts and Jobs Act
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 them.
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 planning.
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 foreign subsidiaries.
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 property.
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.
Fenwick & West