Since our last quarterly international tax update, extensive final and proposed international tax Treasury Regulations were released. We covered many of these topics in greater detail during our webinar, Key International Tax Considerations Q4 2020, a recording of which can be viewed here.
Accordingly, we have listed below what we consider the most significant updates, with links to the pertinent slides from our presentation and Treasury and IRS releases.
Global Intangible Low-Taxed Income (GILTI) and Subpart F High-Tax Exclusions
In July 2020, the Treasury and IRS issued final and proposed new regulations relating to the application of the high-tax exclusion to GILTI and Subpart F. The final regulations maintained the basic framework of the proposed regulations, including the threshold foreign effective tax rate of 18.9%, but there were several important changes. Our presentation covers these in more detail, an outline of which can be seen here on slides 9-15.
Foreign-Derived Intangible Income (FDII)
Final regulations were also released for Internal Revenue Code (IRC) Section 250 that will apply to tax years beginning on or after Jan. 1, 2021. Under Section 250, a domestic corporation can deduct 37.5% of its FDII, with the percentage for the deduction dropping to 21.875% of FDII after Dec. 31, 2025. Further details about the final regulations, including their interaction with Section 962, were discussed during our webinar and slides on that discussion can be found on slide 18 here.
IRS International Tax Campaigns
During 2020, the IRS announced several new compliance campaigns including inter alia internationally oriented, and internationally oriented targets such as the FIRPTA Reporting Compliance for Nonresident Aliens, and Nonresident Alien Rental Income from U.S. Property. For an outline of what we discussed during our November webinar, please refer to on slide 24 here.
Source of Cross-Border Manufactured Inventory Sales Income
On Sept. 29, 2020, the Treasury and IRS issued final regulations addressing the source of income from sales of inventory under Section 863(b). We discussed how tax reform under the law commonly known as the Tax Cuts and Jobs Act modified the source of income from sales of inventory and the final regulations in our webinar, slides of which can be found here.
Sale of Partnership Interest by Foreign Person
Final regulations clarify the treatment of gain or loss recognized by a foreign person on the sale of an interest in a partnership that is engaged in the conduct of a trade or business within the U.S. The rules apply to transfers occurring on or after Dec. 26, 2018. We discussed them in more depth during our presentation, an outline of which can be found in the slides 29-31 here.
DRD for Foreign Source Dividends
In August 2020, the Treasury and IRS issued final regulations under Section 245A that clarify the dividends-received deduction (DRD) available for U.S. corporations that own 10% or more of a foreign corporation (other than a passive foreign investment company that is not also a controlled foreign corporation). Webinar slides related to the final rules can be found on slides 34-37 here.
Stock Ownership Attribution from Foreign to U.S. Persons
If one or more U.S. shareholders owns directly or indirectly under Section 958(a), or constructively under Section 958(b), more than 50% of the stock (by vote or value) of a foreign corporation, that foreign corporation is a CFC. We discussed in our presentation the final and proposed regulations on the repeal of Section 958(b)(4) – thus allowing stock attribution from foreign to U.S. persons with potentially far-reaching consequences, slides from which can be viewed here on slides 38-44.
Foreign Tax Credits
Additional guidance was released related to the allocation and apportionment of deductions and foreign taxes, foreign tax redeterminations, foreign tax credit disallowance under Section 965(g), consolidated groups, hybrid arrangements and certain payments under Section 951A. Please click on this link to the Treasury and IRS release describing and incorporating these rules.
Passive Foreign Investment Companies
Final guidance was issued for passive foreign investment companies (PFICs). Please click on this link to Treasury and IRS releases describing and incorporating these rules.
For More Information
For more information on these developments, please feel free to contact a member of our team.
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