TEI Submits Comments to the Treasury and IRS Regarding Proposed GILTI Regulations.

• Position: Tax Executives Institute, global intangible low taxed income

On December 22, 2017, Public Law No. 115-97, colloquially known as the Tax Cuts & Jobs Act (the TCJA), was enacted into law. The TCJA represents the most sweeping change to the U.S. Internal Revenue Code (the Code) since the Tax Reform Act of 1986. The numerous additions and modifications to the Code require equally sweeping additions and modifications to the U.S. Treasury Regulations promulgated thereunder.

As part of these newly required regulations, on October 10, 2018, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (the Service) published in the Federal Register proposed regulations [REG-104390-18] under section 951A (the Proposed Regulations). The Proposed Regulations provide additional detail regarding the calculation of the amount of global intangible low-taxed income (GILTI) that U.S. shareholders of controlled foreign corporations (CFCs) must include in their taxable income in a particular year. Treasury and the Service solicited comments on the Proposed Regulations from interested parties no later than November 26, 2018. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the government's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in North and South America, Europe, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies around the world.

TEI Comments

TEI commends the Service and Treasury for publishing the Proposed Regulations in a timely manner. The Proposed Regulations provide helpful interim guidance to assist taxpayers in managing their business affairs while maintaining compliance with the requirements of section 951A. While the interim guidance is appreciated, it appears the Service and Treasury have left to future guidance many important questions concerning the interaction of section 951A with the foreign tax credit. Considering this apparent decision, we only discuss below issues directly relevant to the Proposed Regulations.

Determination of Qualified Business Asset Investment and temporarily held property

When determining a taxpayer's U.S. shareholder's GILTI inclusion, it is necessary to determine the shareholder's qualified business asset investment (QBAI). For purposes of calculating QBAI, proposed regulation section 1.951A-3(h)(1) (the "temporarily held property rule") provides that temporarily held property acquired with "a principal purpose" of reducing a U.S. shareholder's GILTI inclusion will be disregarded for purposes of calculating a CFC's QBAI. For this purpose, any tangible property held by a CFC for less than a 12-month period that includes at least the close of one quarter during the CFC's taxable year is presumed to have been acquired with a principal purpose to reduce a U.S. shareholder's GILTI inclusion if it in fact does so (the "12-month presumption rule").

TEI recommends eliminating the 12-month presumption rule in final regulations. The rule would impose an immense compliance burden on U.S. taxpayers by requiring asset-by-asset tracking of ordinary course business transactions. Moreover, its retrospective nature creates financial statement volatility and compliance issues by potentially requiring amended returns for each taxable year merely to adjust after-the-fact QBAI calculations for non-abusive transactions. A general anti-abuse rule without an overbroad presumption should give the Service sufficient authority to police any perceived abusive transactions. If Treasury and the Service feel a per se rule remains necessary, the final regulations should at least provide an exemption for asset transfers between related CFCs.

The 12-month presumption rule is overbroad and creates compliance difficulties for taxpayers in its current form. TEI member companies engage in a wide variety of business-driven, ordinary course transactions that would be captured by this rule. The resulting compliance burden would be disproportionate to any perceived abuse, as in a vast majority of cases there is no "principal purpose" to reduce a taxpayer's GILTI inclusion. In addition, the proposed rule creates uncertainty regarding GILTI basis calculations for a full year after any property acquisition. This will cause financial statement volatility over the course of that 12-month holding period by requiring taxpayers who may sell such property within that period to correct their prior reporting. The 12-month presumption rule will also require taxpayers to file amended returns due to ordinary-course dispositions of tangible property acquired by a CFC late in a taxable year.

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