1. Federal Bar Tax Law Conference-Inbound Developments (March 8, 2019)
Private Sector Panelists:
Joseph Calianno, BDO USA LLP (Moderator)
Heather K.P. Fincher, BakerHostetler
Alan Granwell, Holland & Knight LLP
Brad Rode, Andersen Tax LLC
Government Panelists:
Subin Seth, IRS
Tracy M. Villecco, IRS

2. Repeal of Section 958(b)(4) Sections 864(c)(8) and 1446(f) FATCA
Agenda
BEAT
Section 267A
Repeal of Section 958(b)(4)
Sections 864(c)(8) and 1446(f)
FATCA
*Note—the discussion will cover selected issues relating to the above topics

3. Base Erosion and Anti-Abuse Tax (BEAT)
The Base Erosion and Anti-Abuse Tax or BEAT requires certain corporations to pay additional corporate tax in situations where such corporations have certain “base erosion payments” to foreign related parties and certain thresholds and conditions are satisfied (complicated formula for determining the tax)
Can impact a number of corporations in different industries and with different organizational structures (e.g., U.S. parented groups and foreign parented groups) that make “base erosion payments” when such corporations are “applicable taxpayers”
Often viewed as an inbound rule but applies outbound as well
Applies to base erosion payments paid or accrued in taxable years beginning after December 31, 2017

4. Applicable Taxpayer
Very generally, the BEAT applies to an applicable taxpayer
An applicable taxpayer:
Is a corporation (other than a RIC, REIT or S corporation);
Has average annual gross receipts for the prior 3-taxable year period ending with the preceding taxable year of at least $500 million; and
Has a “base erosion percentage” of 3% or more for the tax year (2% where a bank or securities dealer is part of the affiliated group)
Certain aggregation rules in Section 59A(e) apply in determining the above thresholds
IRS and Treasury issued proposed regulations (“Proposed Regulations”) providing guidance on Section 59A (See REG )

5. Outline of Proposed Regulations (BEAT)
Prop Reg §1.59A-1 Base erosion and anti-abuse tax
Prop Reg §1.59A-2 Applicable taxpayer
Prop Reg §1.59A-3 Base erosion payments and base erosion tax benefits
Prop Reg §1.59A-4 Modified taxable income
Prop Reg §1.59A-5 Base erosion minimum tax amount.
Prop Reg §1.59A-6 Qualified derivative payment
Prop Reg §1.59A-7 Application of base erosion and anti-abuse tax to partnerships
Prop Reg §1.59A-8 Application of base erosion and anti-abuse tax to certain expatriated entities
Prop Reg §1.59A-9 Anti-abuse and recharacterization rules
Prop Reg §1.59A-10 Applicability date

6. Some Selected Takeaways from Proposed Regulations/Preamble
Defines the term aggregate group to mean the group of corporations determined by:
Identifying a controlled group of corporations as defined in Section 1563(a), except that the phrase “more than 50 percent” is substituted for “at least 80 percent” each place it appears in Section 1563(a)(1) and the determination is made without regard to Sections 1563(a)(4) and (e)(3)(C), and
Once the controlled group of corporations is determined, excluding foreign corporations except with regard to income that is, or is treated as, effectively connected with the conduct of a trade or business in the United States
Notwithstanding the foregoing, if a foreign corporation determines its net taxable income under an applicable income tax treaty of the U.S., it is excluded from the controlled group of corporations except with regard to income taken into account in determining its net taxable income
See Prop. Reg. 1.59A-1(b)(1)

7. Some Selected Takeaways from Proposed Regulations/Preamble
Provide rules under Prop. Reg. 1.59A-2 relating to calculating the gross receipts of taxpayer/aggregate group including rules relating to:
Disregarding transactions between aggregate group members--transactions that occur between members of the taxpayer's aggregate group that were members of the aggregate group as of the time of the transaction are not taken into account
In the case of a foreign corporation that is a member of an aggregate group, only transactions that relate to income effectively connected with, or treated as effectively connected with, the conduct of a trade or business in the U.S. are disregarded for this purpose. In the case of a foreign corporation that is a member of an aggregate group and that determines its net taxable income under an applicable income tax treaty of the U.S., only transactions that are taken into account in determining its net taxable income are disregarded for this purpose.
Gross receipts of foreign corporations-with respect to any foreign corporation, only gross receipts that are taken into account in determining ECI or, in the case of a treaty, net taxable income, are taken into account for purposes of the gross receipts threshold

8. Some Selected Takeaways from Proposed Regulations/Preamble
Provide rules under Prop. Reg. 1.59A-2 relating to calculating the gross receipts of taxpayer/aggregate group including rules relating to (con’t):
Gross receipts of consolidated groups- the gross receipts of a consolidated group are determined by aggregating the gross receipts of all of the members of the consolidated group
Gross receipts of partnerships-If a member of an aggregate group owns an interest in a partnership, the Proposed Regulations provide that the group includes its share of the gross receipts of the partnership in its gross receipts computation
Other rules (short years, taxpayers not in existence for entire 3 year period, predecessors, period for measuring gross receipts of the aggregate group, insurance companies, etc.)
What about acquisitions/disposition of corporations?
Note-Prop. Reg. 1.59A-1(b)(13) provides that the term gross receipts has the meaning provided in Reg T(f)(2)(iv).

9. Some Selected Takeaways from Proposed Regulations/Preamble
As it relates to base erosion payments:
In general, the determination of whether a payment or accrual by the taxpayer to a foreign related party is a base erosion payment is made under general U.S. federal income tax law. For example, the Proposed Regulations do not explicitly address whether a royalty payment is classified as deductible under Section 162 or as a cost includible in inventory under Sections 471 and 263A resulting in a reduction in gross income under Section 61.
A non-cash payment (e.g., stock) by a taxpayer to a foreign related party may be a base erosion payment notwithstanding that it is incurred in a nonrecognition transaction
For example, a domestic corporation’s acquisition of depreciable assets from a foreign related party in a Section 351 exchange, a Section 332 liquidation, or a reorganization defined in Section 368 could qualify as a base erosion payment
In the context of a treaty, certain internal dealings between a U.S. PE and the foreign corporation’s home office (or other foreign branches) may result in a base erosion payment
In the Preamble, Treasury states that, because Section 59A(d)(1) defines the first category of base erosion payment as “any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowable under this chapter”, a base erosion payment also includes a payment to a foreign related party resulting in a recognized loss; for example, a loss recognized on the transfer of property to a foreign related party (note—Section 267 may defer loss)

10. Some Selected Takeaways from Proposed Regulations/Preamble
As it relates to exceptions to base erosion payments:
Service Cost Method (SCM) exception--Assuming certain requirements under the Proposed Regulations are satisfied relating the SCM exception, only the “mark up” or “profit” element of the of the payment is treated as a base erosion payment (Treasury rejected an all or nothing approach)
ECI exception--payments to a foreign related party that are subject to net- based tax as ECI or a similar standard under a US income tax treaty are excluded from the definition of base erosion payments
Exceptions for Section 988 losses and TLAC

11. Some Selected Takeaways from Proposed Regulations/Preamble
As it relates to exceptions to base erosion payments (con’t):
The Proposed Regulations confirm the exclusion of a deduction described in Section 59A(c)(2)(A)(i) (deduction allowed under Chapter 1 for the taxable year with respect to any base erosion payment) or Section 59A(c)(2)(A)(ii) (deduction allowed under Chapter 1 for the taxable year for depreciation or amortization with respect to any property acquired with such payment) that is allowed in a taxable year beginning after December 31, 2017, if it relates to a base erosion payment that occurred in a taxable year beginning before January 1, 2018
The Proposed Regulations provide that any disallowed disqualified interest under Section 163(j) that resulted from a payment or accrual to a foreign related party and that is carried forward from a taxable year beginning before January 1, 2018, is not a base erosion payment (Treasury reverses position taken in Notice )

12. Some Selected Takeaways from Proposed Regulations/Preamble
The computation of modified taxable income is done on an add-back basis.
The proposed regulations do not provide for the recomputation of income.
A “vintage year” approach is applied in determining NOL base erosion percentage.
Proposed Regulations generally take an aggregate approach to partnerships
The Proposed Regulations clarify that the BEAT is computed and imposed at the consolidated group level, rather than determined separately for each member of the group.
Consistent with the single-entity approach, intercompany transactions are not taken into account for purposes of calculating the BEMTA

13. Sec 267A – Anti-Hybrid Limitation
No deduction allowed for Disqualified related party amount (DRPA) paid or accrued if—
Pursuant to a hybrid transaction; or
By or to a hybrid entity.
DRPA includes interest or royalty paid or accrued to a related party (RP) if—
The amount is not included in income of the RP under the tax law of the country of which such RP is a resident for tax purposes or is subject to tax; or
Such RP is allowed a deduction with respect to such amount under the tax law of such country.
DRPA does not include any payment to the extent included in gross income of a U.S. shareholder under section 951(a).
RP is defined by reference to section 954(d)(3) with modification to substitute person referred to section 267A(a)(1) for CFC.

14. Sec 267A – Anti-Hybrid Limitation
Hybrid transaction means any transaction, series of transactions, agreement, or instrument one or more payments with respect to which are treated as interest or royalties and which are not so treated for purposes of the tax law of the foreign country of which the recipient of such payment is resident for tax purposes or is subject to tax.
Hybrid entity means any entity—
treated as fiscally transparent for U.S. tax purposes but not so treated for purposes of the tax law of the foreign country of which the entity is resident for tax purposes or is subject to tax, or
treated as fiscally transparent for purposes of such tax law but not so treated for U.S. tax purposes.

15. Sec 267A – Anti-Hybrid Limitation
Treasury to issue guidance as may be necessary or appropriate, including guidance addressing:
Conduit arrangements;
Branches or domestic entities;
Certain structured transactions;
Treatment of a tax preference as an exclusion from income if reduces generally applicable tax rate by 25% or more;
Treatment of a participation exemption as an exclusion or deduction;
The tax residence of an entity that is otherwise considered a tax resident of more than one country, or no country;
Exceptions for cases where disqualified related party amount is taxed by country other than related party’s residence country; and
Other cases that do not present risk of eroding US tax base.
Effective for taxable years beginning after 2017

16. Proposed Sec 267A Regulations
1.267A-1 Disallowance of certain interest and royalty deductions
1.267A-2 Hybrid and branch arrangements
1.267A-3 Income inclusions and amounts not treated as disqualified hybrid amounts
1.267A-4 Disqualified imported mismatch amounts
1.267A-5 Definitions and special rules
1.267A-6 Examples
1.267A-7 Applicability dates

17. Example 1(i) – Hybrid Instrument
Description:
FX has hybrid loan to USCo – debt for U.S. tax purposes and equity for FX jurisdiction tax purposes.
Were the payment to be treated as interest for Country X tax purposes, FX would include $50x in income.
Analysis:
Payment made pursuant to a hybrid transaction.
A no-inclusion occurs because payment is eligible for participation exemption in Country X.
Payment is nondeductible as disqualified hybrid amount (DHA).
See Prop. Reg A-6(c), Ex. 1 for additional details. FX
Hybrid Loan
US1
$50
Specified Payment

18. Example 3(i) – Disregarded Payment
Description:
US1 is regarded for US tax purposes but disregarded for Country X tax purposes—therefore, $100 payment is disregarded.
Were payment to be regarded in Country X, it would be included income.
US1 has third party transactions including $125 of income and $60 of deductions.
FX has net income of $65 for Country X tax purposes, which is considered dual inclusion income.
Analysis:
DHA arises to the extent of the excess of the specified payment of $100 over the dual inclusion income of $65—i.e., $35.
See Prop. Reg A-6(c), Ex. 3 for additional details. FX
Hybrid Loan
US1
$100
Specified Payment
Third party transactions:
Income $125
Deductions <60>
Net $65

19. Example 8(i) – Disqualified Imported Mismatch Amounts
Description:
FX receives hybrid interest as a dividend and excludes under participation exemption.
Analysis:
US1 interest payment is a disqualified imported mismatch amount (DIMA) to the extent income attributable to the payment is directly or indirectly offset by a hybrid deduction incurred by a tax resident or taxable branch related to the specified party.
A hybrid deduction arises because FW is allowed a deduction under its tax law that would be a DHA under section 267A if its country of tax residence had such rules.
US1 interest payment is therefore a DIMA and deduction is disallowed.
See Prop. Reg A-6(c), Ex. 8 for additional details. FX
Hybrid Loan
$100 Hybrid Interest FW
Non-Hybrid Loan
$100 Interest
(Imported Mismatch Payment)
US1

20. Prop. Reg. § 1.1503(d)-7 Example 41 Description:
Under Country Z tax law, DCC is fiscally transparent, but elects to be treated as an association for U.S. federal tax purposes.
Analysis:
DCC is a domestic consenting corporation and is treated as a dual resident corporation for DCL purposes.
FSZ1 derives or incurs items of income, gain, deduction, or loss of DCC because, under Country Z tax law, DCC is fiscally transparent.
DCC has a $100x DCL for taxable year 1.
Because the loss is available to, and in fact does, offset income of FSZ1 under Country Z tax law, there is a foreign use of the DCL in year 1.
The result would be the same if FSZ1 were to indirectly own its DCC stock through an intermediate entity that is fiscally transparent under Country Z tax law, or if an individual were to wholly own FSZ1 and FSZ1 were a disregarded entity. In addition, the result would be the same if FSZ1 had no items of income, gain, deduction, or loss, other than the $100x loss attributable to DCC.
*For details on the proposed regulations under Section 1503(d) and 7701 (including proposed applicability of certain provisions and transition rules), see REG
FZ1
Country Z Tax Law:
Operating income $ 60x
Loss from DCC <$100x>
DCC
U.S. Tax Law:
Deductions <100>
NOL <$100>

21. “Downward Attribution” (§ 958(b)(4))
To determine whether a US person is a US Shareholder and whether a foreign corporation is a CFC, direct/indirect/constructive ownership rules applied
US Shareholder: 2017: 10% or more of Vote; in 2018, 10% of Vote or Value
CFC: More than 50% of Vote or Value held by US Shareholder
Note: Taxation only if a US person is a US Shareholder and owns a direct or indirect interest
Stock owned by a NRA not considered as owned by a U.S. citizen or resident alien individual
Repeal. TCJA repealed Section 958(b)(4), which prevented constructive attribution from (1) a foreign corporation to a U.S. corporation, (2) a foreign partner to a U.S. partnership, and (3) a foreign beneficiary to a U.S. trust, retroactive to 2017 and to future years
Result: Constructive attribution to U.S. persons now may trigger taxation under Subpart F and Transition Tax for 2017 and Subpart F and GILTI for tax years 2018 forward
Another trap. Downward Attribution repeal impacts planning under "portfolio interest rules“
As a result of the repeal of Section 958(b)(4), foreign subsidiaries of a foreign parent may become CFCs, which can implicate Form 1099 reporting and backup withholding obligations; this result may be an unforeseen consequence of the repeal

22. “Downward Attribution” (§ 958(b)(4))
Senate Finance Committee included the following language:
“[t]he provision is not intended to cause a foreign corporation to be treated as a controlled foreign corporation with respect to a U.S. shareholder as a result of attribution of ownership under section 318(a)(3) to a U.S. person that is not a related person (within the meaning of section 954(d)(3)) to such U.S. shareholder as a result of the repeal of section 958(b)(4).”
However, no carve out was added to the Code to reflect the above language

23. Downward Attribution Examples
Corporations
Partnerships
FP#1
FB#2
F Co
USP
Downward
Attribution
Partnership
100% US Co
F Sub
Assume FB2 owns F Co
USP constructively owns F Co
See Reg (f)(45) for some special rules relating to limiting attribution in limited situations for purposes of determining specified foreign corporation status for purposes of Section 965.
F Co
After repeal, US Co constructively owns F Sub stock through Downward Attribution from F Co
Application to foreign-owned MNCs with 50% or greater ownership value in US Sub; now all deemed CFCs

24. Downward Attribution Expanded U.S. Taxation
Old Rule: No "downward" attribution of FP Co's 91% ownership in F Sub to US Sub; therefore, F Sub not a CFC
Under TCJA: US Sub constructively owns FP Co's 91% interest in F Sub, making it a CFC
Result: US Sub subject to Transition Tax, Subpart F and GILTI
Note, taxation implicated because of US Sub’s 9% direct ownership
For taxation, need direct or indirect ownership for taxation under Transition Tax, Subpart F and GILTI
If only constructive ownership, no taxation, and as it relates to filing Form 5471, possible exception if no U.S. shareholder with Section 958(a) ownership FP Co
>50%
91% US
Sub F
Sub 9%

25. Downward Attribution Technical Amendment
On January 2, 2019, then-outgoing Ways and Means Committee Chairman Kevin Brady (R-TX) released a discussion draft of the Tax Technical and Clerical Corrections Act. Chairman Brady 
An amendment is "repeal" of the "repeal" of the Downward Attribution rule, to the extent it causes CFC status in an unrelated person situation not related to inversions
Future of the repeal effort uncertain, given reluctance of Democrats to support TCJA fixes

26. Sec 864(c)(8) – Foreign Transfers of Partnership Interests
Gain or loss on certain transfers of partnership interests by foreign persons may be treated as effectively connected income (ECI) to the extent the transferor would have had EC gain or EC loss if the partnership had sold all its assets at FMV
Applies when a nonresident alien individual or foreign corporation sells or exchanges its interest in a partnership and the partnership (or a lower-tier partnership indirectly owned by the foreign person) is engaged in any trade or business within the U.S.
Prior treatment of such sales by foreign transferors:
Rev. Rul (under aggregate approach, gain effectively connected)
Grecian Magnesite Mining, 149 T.C. No. 3 (2017) (under entity approach, gain not effectively connected)
Section 864(c)(8) overturns the result in Grecian Magnesite

27. Sec 864(c)(8) – General Example
Description:
Partnership (PRS) is engaged in a USTB
Foreign Partner (FP) sells its 15% interest in PRS in a taxable sale at a gain
Analysis:
Rev. Rul would treat FP’s gain as ECI to extent attributable to PRS’s USTB assets
Grecian Magnesite would treat FP’s gain as foreign source under section 865(a), not subject to U.S. income tax
Section 864(c)(8)’s approach is similar to Rev. Rul
Foreign Partner
Other Partners
15%
85%
PRS
USTB
assets

28. Sec 864(c)(8) – Proposed Regulations
REG (Gain or Loss of Foreign Persons From Sale or Exchange of Certain Partnership Interests)
§ 1.864(c)(8)-1 (new)
§ (new)
§ T (amended)
Steps to calculate amount treated as EC:
Determine FP’s outside capital gain or loss and outside ordinary gain or loss under applicable U.S. tax law (e.g., 741, 751, 752(d)).
Note nonrecognition transactions carve out
(Prop. Reg. § 1.864(c)(8)-1(b)(2)(ii))
Determine PRS 1’s deemed sale gain or loss with respect to each asset it holds (i.e., the amount of gain or loss PRS would recognize in a deemed sale to an unrelated party for cash equal to each asset’s FMV immediately before the foreign partner’s transfer).
Note tiered partnerships
(Prop. Reg. § 1.864(c)(8)-1(e)) FP
PRS 1
other
assets
PRS 2
PRS 3

29. Sec 864(c)(8) – Proposed Regulations (cont.)
Steps to calculate amount treated as EC (cont.):
Determine the amount of gain or loss with respect to each asset deemed sold that would be treated as EC gain or EC loss.
By (a) apply sourcing rules (§§ , 865), then (b) determining if items are considered EC (§ 864)
Note regarding U.S. office rule
(Prop. Reg. § 1.864(c)(8)-1(c)(2)(i))
Assets include U.S. real property interests
Exception: Gain or loss will not be EC on the deemed sale of certain assets held for 10 prior years that (a) produced no taxable ECI, and (b) were not used, or held for use, in a USTB.
Determine FP’s distributive share of the deemed sale EC gain or loss.
Note coordination with tax treaties
(Prop. Reg. § 1.864(c)(8)-1(f))
The outside gain or loss recognized is treated as EC gain or loss to the extent it does not exceed FP’s aggregate deemed sale EC capital/ordinary gain or loss

30. Prop. Reg. § 1.864(c)(8)-1(i), Example 1
Description:
FP’s adjusted basis in its interest in PRS is $100.
FP sells its entire interest in PRS to X for $105.
PRS’s balance sheet reflects:
U.S. capital asset which is a USTB asset (FMV 104, AB 100)
Country A capital asset (FMV 106, AB 100)
Analysis:
FP recognizes $5 of outside capital gain (under § 741).
On a deemed sale, PRS would recognize $4 gain on the U.S. asset and $6 gain on the Country A asset.
PRS’s deemed sale effectively connected gain is $4.
FP’s aggregate deemed sale effectively connected capital gain is $2.
FP recognizes $2 of the $5 outside capital gain as effectively connected capital gain.
See Prop. Reg (c)(8)-1(i), Ex. 1 for additional details.
Foreign Partner FP
U.S. Partner
USP
$105
50%
50% X
PRS
Country A Business
U.S. Business
USTB
asset
asset

31. Sec 1446(f) – The Statute
New § 1446(f) rules apply if any portion of gain on disposition of partnership interest would be treated as EC under § 864(c)(8)
General rule: Requires transferee to withhold 10% of the transferor’s amount realized on disposition of a partnership interest
Exception: No withholding required if transferor furnishes an affidavit stating not foreign person and providing U.S. TIN
Unless actual knowledge that the affidavit is false
Same rules as § 1445(d) apply to agents
Secretary may prescribe reduced withholding amount
If transferee fails to withhold, the partnership is required to withhold the required amount from distributions to transferee
Definitions under § 1445 apply
Secretary to prescribe regulations, including provision of exceptions

32. Sec 1446(f) – IRS Notice 2018-8 Released January 2, 2018
Suspends the application of § 1446(f) to dispositions of certain publicly traded partnership (PTP) interests
withholding on dispositions of PTP interests not required until regulations or other guidance issued
Future guidance will be prospective and will include transition rules
See Notice for additional details.

33. Sec 1446(f) – IRS Notice 2018-29 Released April 2, 2018
Suspends partnership withholding requirements under § 1446(f)(4) until regulations or other guidance issued
Provides use of § 1445 principles (relating to dispositions of U.S. real property interests) for the reporting and paying of amounts withheld
Limits withholding in certain cases to actual cash or property transferred when amount realized includes a reduction in share of liabilities
Provides additional exceptions to withholding
See Notice for additional details.

34. Sec 1446(f) - IRS Notice 2018-29 (cont.)
Some Notable Exceptions. Generally, no requirement to withhold:
if transferor certifies to the transferee:
Non-Foreign Status – that transferor is not a foreign person
Form W-9 generally sufficient
No Realized Gain – that the transfer of a partnership interest will not result in realized gain
< 25% ECI for Prior 3 Years – that for each of the past 3 years, the transferor was a partner and the transferor’s effectively connected taxable income from the partnership each year was < 25% of the transferor’s total distributive share of income from the partnership
Nonrecognition Transaction - that the transferor is not required to recognize any gain or loss on the transfer by reason of a nonrecognition provision
if partnership certifies to the transferee that if the partnership had sold all its assets at FMV, the EC gain would be < 25% of the total gain

35. This document is not written tax advice directed at the particular facts and circumstances of any person. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisers. If you are interested in the subject of this document we encourage you to contact an independent tax advisor to discuss the potential application to your particular situation.
Additionally, the views expressed in this presentation do not necessarily represent the view of the governmental agency or organization that the presenters are affiliated with.