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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

When Congress expanded the definition of a “U.S. Shareholder” in the T.C.J.A. by requiring the measurement of value as an alternative to voting power, it opened a Pandora’s box of issues.  First, more U.S. Persons became U.S. Shareholders.  Second, it imposed a difficult task for shareholders and corporations to measure relative value of all classes of shares and all holdings of shareholders.  Finally, many plans based on the existence of direct or direct or indirect dividend rights of foreign shareholders were shut down. Proposed regulations will modify the way Subpart F Income is allocated to various classes of shares having discretionary dividend rights. Neha Rastogi and Stanley C. Ruchelman explain the broadened scope of income inclusions under Subpart F.

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A Deep Dive into G.I.L.T.I. Guidance

A Deep Dive into G.I.L.T.I. Guidance

The I.R.S. has published proposed regulations on the global intangible low-taxed income ("G.I.L.T.I.") regime, which is applicable to those controlled foreign corporations that manage to operate globally without generating effectively connected income taxable to the foreign corporation or Subpart F Income taxable to its U.S. Shareholders. In a detailed article, Rusudan Shervashidze, Elizabeth V. Zanet, and Stanley C. Ruchelman examine the proposed regulations and all their complexity.

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities.  In some instances, the new provisions closely follow their foreign counterparts.  In others, the provisions that are specific to U.S. tax law.  Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner.  Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context. 

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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

International tax planning in the U.S. has been turned on its head by the Tax Cuts and Jobs Act (“T.C.J.A.”).  This article looks at (i) the new dividends received deduction that eliminates U.S. tax on the receipt of direct investment dividends paid by a 10%-owned foreign corporation to a U.S. corporation, (ii) the repatriation of post-1986 net accumulated earnings of 10%-owned foreign corporations by U.S. persons and the accompanying deferred tax rules, (iii) changes to Code §367(a) that eliminate an exemption from tax on outbound transfers of assets that will be used in the active conduct of a foreign trade or business, and (iv) a broadening of the scope of Subpart F income by reason of a change to certain definitions.  Rusudan Shervashidze and Stanley C. Ruchelman address and comment on these revisions.

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Contract Manufacturing in a US-Controlled Group

First published by the Canadian Tax Foundation in (2016) 24:7 Canadian Tax Highlights.

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International Practice Unit: I.R.S. Releases Subpart F Sales and Manufacturing Rules

Beate Erwin, Kenneth Lobo, and Stanley C. Ruchelman explain how the branch rule works when a C.F.C. operates a manufacturing or selling branch in another country. While the concept is easy to explain, the computations are somewhat confusing. The article explains all.

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International Practice Unit: What the I.R.S. Looks for When Deciding if a U.S. Shareholder Has an Interest in a C.F.C.

Rusudan Shervashidze and Stanley C. Ruchelman explain the tests the I.R.S. applies to determine whether a foreign corporation is a C.F.C. and a U.S. person is a “U.S. Shareholder” potentially subject to tax under Subpart F. They explain the tax forms that examiners are encouraged to look for and the telltale signs of direct, indirect, and constructive ownership of shares by U.S. persons.

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Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

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President's Legislative Proposals

In late September, the Obama Administration released the tax revisions that are part of its Fiscal Year 2016 Budget Proposal (the Proposal). These changes are designed to provide deficit reduction measures through additional revenue increases and spending cuts. We explain the new twists to seasoned proposals. If enacted, the changes described in the Proposal could influence global patterns of investment and employment by U.S. multinationals.

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Temporary Regulations Alter C.F.C.'s Active Rents and Royalties Exception to Subpart F

Newly issued temporary regulations (T.D. 9733) modify three of the six ways that rental or royalty income can qualify for the active exception to foreign personal holding company income (F.P.H.C.I.) under Subpart F. The new Treas. Reg. §1.954-2T addresses who can perform the required functions when a controlled foreign corporation (C.F.C.) leases or licenses property to an unrelated person, as well as the treatment of cost sharing arrangements.

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Shifting Income and Business Operations

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

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Anti-Deferral Regimes: U.S. Taxation of Foreign Corporations

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When a U.S. business expands abroad, it is frequently believed that the income of foreign subsidiary corporations will not be taxed in the U.S. until dividends are distributed to the U.S. shareholder. This is known as tax deferral, which is the general expectation of clients. However, in the U.S., tax deferral may be overridden by provisions accelerating the imposition of U.S. tax on U.S. shareholders of foreign corporations. As a result, income may be taxed before a dividend is distributed. This article describes the anti-deferral provisions of U.S. tax law that may be applicable in certain situations.

ANTI-DEFERRAL REGIMES

The Internal Revenue Code contains two principal anti-deferral regimes that may impose tax on a U.S. taxpayer on a current basis when its foreign subsidiaries generate income. These provisions reflect a policy under which Congress believes the deferral rules are being abused to inappropriately defer U.S. tax, especially if foreign tax is not imposed for one reason or another. The two regimes are the:

  • Controlled Foreign Corporation (“C.F.C.”) regime under Code §§951-964, also known as the “Subpart F” provisions; and
  • Passive Foreign Investment Company (“P.F.I.C.”) regime under Code §§1291-1298.

Controlled Foreign Corporations

Under Code §957(a), a foreign corporation is a C.F.C. if stock representing more than 50% of either the total combined voting power or the total value of shares is owned, directly, indirectly, or by attribution, by “U.S. Shareholders” on any day during the foreign corporation’s taxable year. With respect to a foreign corporation, a U.S. Shareholder is defined as a “U.S. person” that owns, under the foregoing expanded ownership rules, stock representing 10% or more of the total voting power of all classes of the foreign corporation’s stock that is entitled to vote. A “U.S. person” includes a U.S. citizen or resident, a U.S. corporation, a U.S. partnership, a domestic trust, and a domestic estate. Stock ownership includes indirect and constructive ownership under the rules of Code §958. Consequently, ownership can be attributed, inter alia, from foreign corporations to shareholders, from one family member to another, and from trusts and estates to beneficiaries, legatees, and heirs.