Harvard Yale Princeton Club

Harvard Yale Princeton Club
2019 Update of International Provisions of the “Tax Cuts and Jobs Act”¹ ¹ (The informal name of Pub. L. No (“Act”)), which was enacted on December 22, Complications arose when the House-passed measure reached the Senate later in the day, after the Senate parliamentarian determined that the short title (along with two (2) other provisions) violated the chamber’s Byrd Rule because they had either no impact or only an incidental impact on the federal budget and would need to be stripped out of the bill, unless supporters could produce 60 votes to overcome a point of order. A subsequent effort to waive the point of order failed by a party-line vote of 51 Republican – 48 Democrat. (Striking the short title means that the measure is not officially called the Tax Cuts and Jobs Act and is now known only by its formal title: An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.) Allegheny Tax Society Harvard Yale Princeton Club 619 William Penn Place Pittsburgh, PA 15219 Monday, Oct. 21, 2019, 6:00 – 7:00 PM © 2019 L. Thomas Marchlen ATS TCJA – Oct. 21, 2019.pptx

Overview 1 / 2 Overview - Former International Tax Rules Remain – Except Where Changed Overview - Foreign Tax Credits (“FTCs”) (Repatriation) Transition Tax (“TT”) * Global Intangible Low-Taxed Income (“GILTI”) * 100% DRD & CFC Investments in US Property * Repeal of IRC § 958(b)(4) by § of the TCJA, Pub. L (2017) Business Interest Expense Deduction Limiters Base Erosion Anti-Abuse Tax (“BEAT”) Foreign Derived Intangible Income(“FDII”) * - If Regulations become final within 18 months of enactment (by June 22, 2019 ), they can be retroactive to date of enactment –Dec. 22, 2017– IRC § 7805(b)(2)

Overview Branch Income Hybrid Arrangements
2 / 2 Branch Income Hybrid Arrangements Miscellaneous Changes – Transfer of Branch Losses Miscellaneous Changes – Source of Income Executive Compensation Issues Under TCJA Classif. of Cloud Transact’s & Transact’s Involving Digital Content If Regulations become final within 18 months of enactment (by June 22, 2019 ), they can be retroactive to date of enactment –Dec. 22, 2017– IRC § 7805(b)(2)

Overview - Former International Tax Rules Remain – Except Where Changed
21% Tax Rate for Corporations Subpart F Income High Tax Exception (“HTE”) (> 18.9%) * Previously Taxed Income (“PTI”) Foreign Tax Credits (“FTCs”) * - When proposed regulations become final, New HTE (> 18.9%) may be elected for GILTI – “GILTI High Tax Exclusion” – Caveat: Conf. Rep. No (PL ) at 626 ("Since only a portion (80%) of foreign tax credits can offset [US] tax on GILTI, the minimum foreign tax rate, with respect to GILTI, at which no [US] residual tax is owed by a domestic corporation is [%].") 26.25% before 50% of GILTI deduction. HTE is determined at the Qualified Business Unit (“QBU”) level – IRC § 989(a). Prop. Treas. Reg. § 1.951A-2(c)(6).

21% Tax Rate for Corporations
For calendar year corporations, the US income tax rate and alternative minimum tax rate follows: Prior to 2018: Regular Income Tax – 15%, 25%, 34%, and 35% Alternative Minimum Tax - 20% After 2017 Regular Income Tax – 21% Alternative Minimum Tax (Repealed) – 0% Non-Calendar Year End Corporations (Year-End Not December 31, 2017): Proration based on days before and after December 31, 2017 IRC §§ 11, 15, and 55, Notice , and IR

Subpart F Income Subpart F Income is foreign income that is taxable annually in the US (creating Prev- iously Taxed Income (“PTI”)) whether or not distributed, unless certain exceptions apply Foreign Personal Holding Company Income (“FPHCI”): – Dividends, Interest, Royalties, Rents, unless from a Controlled Foreign Corporation (“CFC”) and not otherwise reducing subpart F income, received prior to 2020 Foreign Base Company Sales Income (“FBCSI”): - Personal property purchased from a related person and sold outside the country in which the purchaser is created or organized, unless used by purchaser to manufacture Foreign Base Company Services Income (“FBCServicesI”): - Income from the performance of services for or on behalf of a related person performed outside the country under laws of which the CFC is created or organized Insurance Income: - Income from insurance or annuity contracts from a CFC This is NOT a comprehensive analysis of subpart F income IRC §§ 951, 952, 953, and 954(a), (c), (d), and (e) and Prop. Treas. Reg. §§ and

Subpart F Income – IRC § 954(c)(6)
Sec. 954(c)(6) excludes dividends, interest, rents, and royalties received from related controlled foreign corporations from income of US shareholder that would ordinarily be taxed under subpart F from Jan. 1, 2006 to Dec. 31, 2019 [could be extended], if from active conduct of a trade or business. Income from inter-company loans creates interest income that is currently taxed in the US as sub-part F income, unless (a) the income is from a corporation created under the laws of the same country as the lending entity (“Same Country Exception”) or (b) the interest income is taxed to the recipient at a rate that is greater than 90% of the US highest tax rate – prior to 2018 was > 31.5% (35% X 90% = 31.5%) and after 2017 is > 18.9% (21% X 90% = 18.9%) (“High Tax Exception”). Interest income generated among entities, which are a single entity for US tax purposes, is disregarded for US tax purposes and does NOT create sub-part F income. The funding of payments of interest among entities can create sub-part F dividend income that is currently taxed in the US, unless the dividends are (1) PTI, (2) same country exception, or (3) high tax exception or (4) funded by loans. This is NOT a comprehensive analysis of subpart F income IRC §§ 951, 952, and 954(a), (b)(4), (c)(6), (d), and (e)

Subpart F Income – Individuals – Taxed as Corporation
Individuals required to pay tax on their share of Subpart F income can elect to be taxed as corporations. Election is based on Revenue Act of 1962 with some minor amendments. Few individuals have made the election. IRC §§ 951, 951A, 953, 954, and 962

High Tax Exception (“HTE”)
An item of income that would be taxable annually in the US under subpart F, whether or not distributed, would not be so taxed if it bears a rate of income tax that is at least 90% of the maximum US regular income tax rate and an election is made to exclude from taxation Prior to 2018: Regular Income Tax – 15%, 25%, 34%, and 35% High Tax Exception – > 31.5% After 2017 Regular Income Tax – 21% High Tax Exception – > 18.9% Fiscal year end taxpayers - blended rates based on days before and after December 31 IRC §§ 11, 15, and 954(b)(4) and Treas. Reg. § (d)(5) and Prop. Treas. Reg. § (d)(3) High Tax Exception is also known as High Tax Exclusion

Previously Taxed Income (“PTI”)
PTI is foreign income that was previously taxed in the US When PTI is distributed, it is not taxed in the US again, except when the entity distributing the PTI has a Functional Currency (“FC”) that is not the US dollar If the entity making the distribution has a FC other than the US dollar, foreign currency gain or loss is recognized due to changes in the rate of exchange between the dates the income is taxed and the dates that the PTI is distributed There may be additional FTC in the year of receipt of PTI (when distributed) IRC §§ 959 and 986(c) and Prop. Treas. Reg. §

Previously Taxed Income (“PTI”) – Tax Basis in Shares
IRC § 959(c)(1) – IRC § 956 investment in US property, guarantees, pledges = IRC § 961 tax basis – IRC § 986(c) applicable IRC § 959(c)(2) – IRC §§ 951 & 954 subpart F income & IRC § 951A GILTI = IRC § 961 tax basis – IRC § 986(c) applicable IRC § 959(c)(2) – IRC § 965(a) PTI – PTI from TT income (net of E&P deficits) = IRC § 961 tax basis – IRC § 986(c) applicable IRC § 959(c)(2) – IRC § 965(b) PTI – PTI from TT linking IRC § 965(a) PTI to E&P deficits ≠ IRC § 961 tax basis – IRC § 986(c) NOT applicable IRC §§ 951, 951A, 954, 956, 959, 961, and 986(c) and Prop. Treas. Reg. § (a)(2) and (3) and (g)(4) and (5)

Overview – Foreign Tax Credits (“FTCs”)
FTCs – Computation Excess FTCs FTC Limiters IRC § 901(m) – Covered Asset Acquisitions Reduce Cash Tax – FTCs Less Useful GILTI HTE Election – FTCs FTCs – Categories of Income FTCs – Gross Up FTCs – Individuals – GILTI FTCs – Tax Forms FTCs – Proposed Treasury Regulations

Foreign Tax Credits (“FTCs”) - Computation
Separate computation for each category of income (a) FTC for US All of a Category of Income Minus Category = Tax on X Allocated and Apportioned Expenses of Income World Wide World Wide Income Taxed in US Limit Income (b) Actual Foreign Tax on Category of Income Lesser of (a) or (b) is allowable FTC for Category of Income IRC §§ , 904(a) and (d) and Treas. Reg. § and Prop. Treas. Reg. § with preface

Excess Foreign Tax Credits (“FTCs”)
Carry Back (“C/B”) 1 Year and Carry Over (“C/O”) 10 Years – But NOT for GILTI IRC § 904(c) and (d)(1)(A) and Prop. Treas. Reg. § and -3 10 Years to Change Election to Claim FTC or Deduct Foreign Income Taxes, Rather than General 3 Year Statute of Limitations for Refunds – Foreign Tax Deductions, Rather than FTCs, can Reduce GILTI IRC §§ 901 and 6511(d)(3) and Treas. Reg. § (d) Unable to Claim FTC Due to Losses IRC § 904(a) and Prop. Treas. Reg. § , -3, -4, and -5

FTC Limiters There is minimal discussion herein of additional US tax costs attributable to allocations and apportionment of interest expenses, research & experimental expenses, stewardship expenses, or other expenses under IRC §§ 861 & 864(e). New IRC § 904(b)(5) disregarding income and deductions related to new IRC § 245A add additional considerations in computing FTC limitations. Also, there is no discussion herein of categories of foreign source income and the relationship of categories of foreign source income to categories of FTCs under IRC § 904(d) and recapture of Overall Foreign Loss and recharacterization of Overall Domestic Loss (“ODL”) under IRC § 904(f) & (g). All of the issues identified herein (other than ODL) limit the use of FTCs to offset US tax obligations on various types of foreign source income. ODL recapture allows use of excess FTCs. See the next slide for “covered asset acquisitions under IRC § 901(m). Prop. Treas. Reg. § 1.904(b)-3, Treas. Reg. § & Prop. Treas. Reg. § with preface and Treas. Reg. § 1.951A-2(c)(3) and (g)(4)(ii)

IRC § 901(m) - Covered Asset Acquisitions
Entities that make an IRC § 338 election (timely filing Forms 8023 / 8883) for a corporation or make an IRC § 754 election for a partnership or other transaction (DRE sale) to step up the basis of their assets to FMV on the acquisition date for US tax purposes and do not have similar treatment under local law have made a “covered asset acquisition.” Some (maybe all) local income taxes paid by entities that make IRC §§ 338 and 754 elections (or DRE sales) might not be creditable for US tax purposes because the entity acquisitions making IRC §§ 338 and 754 elections (or DRE sales) will be making “covered asset acquisitions,” which limit available Foreign Tax Credits (“FTCs”) for US tax purposes under IRC § 901(m). Foreign tax, if not creditable due to IRC § 901(m), will be deductible under IRC § 164(a)(3) and (b)(3) and IRC §§ 78 and 275 will not apply. IRC § 901(m)(6). Although IRC § 901(m) was enacted in 2010, Treasury Regulations providing direction to taxpayers have not yet been proposed or promulgated.

Reduce Cash Tax – Foreign Tax Credits (“FTCs”) Less Useful
Historically, we have been able to claim 100% of FTCs to offset 100% of US tax obligations GILTI provides de minimis benefit for foreign taxes paid Due to the Act and allocations and apportionments of interest, research & experimental, stewardship, and other expenses against foreign source income causing overall foreign losses, it is possible that taxpayers will deduct, rather than claim FTCs, for foreign taxes paid. Foreign taxes are now offering little significant US tax benefit. Related party interest is becoming more beneficial When proposed regulations become final, must consider election for GILTI High Tax Exclusion (“HTE”) (> 18.9%) determined at the QBU level – Exp. alloc. & apport. N/A IRC §§ 164, 275, 861, 864(e), 901, 904(f), 954(b)(4), 960(a), 986(c), and 6511(d)(3) and Treas. Reg. § (d) and Prop. Treas. Reg. § 1.951A-2(c)(6). 1 / 2

Reduce Cash Tax – Foreign Tax Credits (“FTCs”) Less Useful
When proposed regulations become final, must consider election for GILTI High Tax Exclusion (“HTE”) (> 18.9%) determined at the QBU level If an item of income is excluded from gross tested income by reason of the GILTI HTE, the property used to produce that income, because not used in the production of gross tested income, does not qualify as specified tangible property, in whole or in part, and therefore the adjusted basis in the property is not taken into account in determining QBAI. IRC §§ 164, 275, 861, 864(e), 901, 904(f), 954(b)(4), 960(a), 986(c), and 6511(d)(3) and Treas. Reg. §§ (d) and 1.951A-3(b) and (c)(1) and Prop. Treas. Reg. § 1.951A-2(c)(6). 2 / 2

GILTI HTE Election – FTCs
1 / 2 When proposed regulations become final, taxpayers must consider election for GILTI High Tax Exclusion (“HTE”) (> 18.9% (21% x 90%)) determined at the QBU level with no credit allowed for related foreign taxes, which would be assigned to the CFC's residual income category The election to apply the GILTI HTE (> 18.9%) election to a CFC would be made by US shareholders that collectively own, directly or indirectly, more than 50% of the CFC's stock. The election applies for the CFC's subsequent tax year unless revoked. If revoked, the election would not be available to that CFC for 60 months.

GILTI HTE Election – FTCs
2 / 2 A subsequent election to apply the HTE (> 18.9%) could not be revoked for another 60 months. If the same US shareholders own a majority of the stock of two or more CFCs, an election to apply the GILTI high-tax exception to one CFC (or to revoke such an election) would apply to all the CFCs. QBAI is relinquished for QBUs of GILTI HTE (> 18.9%) electing CFCs. IRC §§ 164, 275, 861, 864(e), 901, 904(f), 954(b)(4), 960(a), 989(a), and 6511(d)(3) and Treas. Reg. § (d) and Prop. Treas. Reg. § 1.951A- 2(c)(6).

Foreign Tax Credits (“FTCs”) – Categories of Income
Use of FTCs is limited to certain categories of income GILTI * (Other than Passive Category Income) Foreign Branch Income Passive Category Income ** General Category Income ** Other Categories of Income are not herein addressed * - Does not carry back and does not carry over ** - Can apply against subpart F income and effectively connected income Excess FTCs from a category of income cannot offset US tax obligations from another category of income – Cross crediting of excess FTCs is not permitted IRC §§ 904(c) & (d)(1) & for TT §§ 902 & 960 before January 1, 2018 & Treas. Reg. § and Prop. Treas. Reg. §§ , -5, and -6

Foreign Tax Credits (“FTCs”) – Gross Up
Generally, 100% of categories of FTCs are added to 100% of categories of income to arrive at taxable income for a category of income. However, only 80% of GILTI FTCs are allowed to offset 100% of GILTI taxable income Excess GILTI FTCs do not carry back and do not carry over Excess FTCs related to other categories of income do carry back and carry over. IRC §§ 78 and 960(d)(1) and Prop. Treas. Reg. §§ , and -3, and , and -2

Foreign Tax Credits (“FTCs”) – Individuals - GILTI
Individuals required to pay tax on their share of GILTI income can elect to be taxed as corporations. However, 50% of GILTI deduction is not available to individuals., unless they elect to be taxed as corporations. Election is based on Revenue Act of 1962 with some minor amendments. Few individuals have made the election. IRC §§ 250, 951A, and 962 and Prop. Treas. Reg. §

Foreign Tax Credits (“FTCs”) – Tax Forms
Form 1116 – Foreign Tax Credit (Individual, Estate, or Trust) Form 1118 – Foreign Tax Credit - Corporations Final TCJA FTC Treasury Regulations and Proposed Treasury Regulations described as "Follow- on Guidance Related to the Foreign Tax Credit, Including Guidance Implementing Changes Made by the Tax Cuts and Jobs Act [TCJA]" were listed as under OMB Office of Information and Regulatory Affairs (“OIRA”) review, having been received October 3, 2019. Separate Forms 1116 and 1118 are required for each category of income: GILTI (Other than Passive Category Income) Foreign Branch Income Passive Category Income General Category Income Other Categories of Income are not herein addressed

Foreign Tax Credit (“FTC”) – Proposed Treasury Regulations
§ Gross up for deemed paid foreign tax credit § Computation of taxable income from sources within the United States and from other sources and activities [also issued under 26 U.S.C. 250(c), 864(e)(7), and 882(c).] § and T Allocation and apportionment of interest expense and rules for asset-based apportionment [also issued under 26 U.S.C. 863(a), 26 U.S.C. 864(e)(7), 26 U.S.C. 865(i), and 26 U.S.C. 7701(f).] § (e) Special allocations of interest expense - Classification of hybrid stock [also issued under 26 U.S.C. 863(a), 26 U.S.C. 864(e)(7), 26 U.S.C. 865(i), and 26 U.S.C. 7701(f).] § Special rules for allocating and apportioning interest expense of an affiliated group of corporations [also issued under 26 U.S.C. 863(a), 26 U.S.C. 864(e)(7), 26 U.S.C. 865(i), and 26 U.S.C. 7701(f).] § Characterization rules and adjustments for certain assets [also issued under 26 U.S.C. 864(e)(7).] § Special rules for characterization of controlled foreign corporation stock [also issued under 26 U.S.C. 864(e)(7).] § [Amended] § Allocation and apportionment of research and experimental expenditures § 1.901(j)-1 Denial of foreign tax credit with respect to certain foreign countries § Limitation on credit for foreign taxes [also issued under 26 U.S.C. 904(d)(7).] § Carryback and carryover of unused foreign tax [also issued under 26 U.S.C. 904(d)(7).] § Carryback and carryover of unused foreign tax by spouses making a joint return [also issued under 26 U.S.C. 904(d)(7).] § Separate application of section 904 with respect to certain categories of income [also issued under 26 U.S.C. 250(c), 904(d)(2)(J)(i), 904(d)(6)(C), 26 U.S.C. 904(d)(7), and 26 U.S.C. 951A(f)(1)(B).] 1 / 2 312 pages with Preamble when released – Nov. 28, 2018 285 pages as sent to the Federal Register – Dec. 7, 2018 67 pages - REG , RIN 1545-B062, 83 FR 63200

Foreign Tax Credit (“FTC”) – Proposed Treasury Regulations
§ Look-through rules as applied to controlled foreign corporations and other entities [also issued under 26 U.S.C. 904(d)(7), and 26 U.S.C. 951A(f)(1)(B).] § Allocation and apportionment of taxes [also issued under 26 U.S.C. 904(d)(7).] § 1.904(b)-3 Disregard of certain dividends and deductions under section 904(b)(4) § 1.904(f)-12 Transition rules § [Amended] § Foreign base company income § Overview, definitions, and computational rules for determining foreign income taxes deemed paid under section 960(a), (b), and (d) [also issued under 26 U.S.C. 960(f).] § Foreign income taxes deemed paid under sections 960(a) and (d) [also issued under 26 U.S.C. 960(f).] § Foreign income taxes deemed paid under section 960(b) [also issued under 26 U.S.C. 960(f).] § Additional foreign tax credit in year of receipt of previously taxed earnings and profits [also issued under 26 U.S.C. 51A(f)(1)(B) and 26 U.S.C. 960(f).] § [Amended] § [Amended] § Applicability dates § Allowance of a credit or deduction for foreign income taxes [also issued under 26 U.S.C. 965(o).] § Elections, payment, and other special rules [also issued under 26 U.S.C. 965(o).] 2 / 2 312 pages with Preamble when released – Nov. 28, 2018 285 pages as sent to the Federal Register – Dec. 7, 2018 67 pages - REG , RIN 1545-B062, 83 FR 63200

(Repatriation) Transition Tax (“TT”) - Summary
TT – Overview TT – Computation of Tax Rates TT – Computation TT – Cash Equivalents TT – Main Elections TT – E&P Deficit Foreign Corporations TT – Installment Payments - Generally TT – Installment Payments – C Corporations TT – Installment Payments – S Corporations TT – Installment Payments – US S/Hs REITS TT – Expatriated Entities (Inversions) TT – Specified Foreign Corporation (“SFC”) TT – SFC - Types TT – Affiliated Groups TT – Individuals – Taxed as Corporations TT – Anti-Abuse Rule TT – E&P Inclusion TT – IRC § 965 – Taxation of Distributions TT – Limited Use of Foreign Tax Credits TT – State Income Tax TT – Form 965 TT – Notices TT – Final Treasury Regulations TT – Proposed Treasury Regulations TT – Revenue Procedures TT – Publication 5292 TT – Frequently Asked Questions

(Repatriation) Transition Tax (“TT”) - Overview
Post-1986 Earnings & Profits (“E&P”) pay TT at the higher amount of E&P (excluding current year subpart F income) as of Nov. 2, 2017 or Dec. 31, 2017 for calendar year end corporations (based on last fiscal year beginning before January 1, 2018) translated (if necessary) using the spot rate into USD on December 31, 2017 – “IRC § 965(a) earnings amount” limited to pro rata share without reduction for dividends, except to another Specified Foreign Corporation (“SFC”), if it increases its E&P – only tax one (1) time Positive E&P can be offset with E&P deficits (only to common shareholders with none to preferred shareholders), resulting in "IRC § 965(a) inclusion amount “ Pre-existing PTI & Effectively Connected Income (“ECI”) as of the measurement date is not subject to TT E&P in the form of cash (including equivalents) is taxed at a rate of 15.5% * Remaining E&P (non-cash) is taxed at a rate of 8% * * - Creates “IRC 965 PTI” and basis in shares until distributed Can satisfy TT liability with excess FTCs & / or with cash (1 payment or 8 installments) ** ** - Can elect not to use Net Operating Losses so that TT is satisfied with FTCs and / or cash IRC §§ 961 and 965 and Treas. Reg. § and -7 Statute of limitations is 6 years from filing of return

Transition Tax (“TT”) – Computation of Tax Rates
E&P in the form of cash (including equivalents) is taxed at a rate of 15.5% * Remaining E&P (non-cash) is taxed at a rate of 8% * (Participation Exemption) A deduction is provided to arrive at the above tax rates considering general corporate rate of 35%, 21%, or a blended rate under IRC § 15 – “IRC § 965(c) deduction amount” (Participation Exemption) FTCs ** used to offset TT are subject to a reduction (haircut) and are not deductible: 55.7% = (1- (15.5% / 35%)) of foreign taxes on cash E&P are disallowed and 77.1% = (1- (8% / 35%)) of foreign taxes on non-cash E&P are disallowed IRC § 78 gross up only applies to foreign taxes generated with the mandatory inclusion When PTI from TT is distributed, WHT, subject to a reduction (haircut) on distribution, is creditable or deductible * - Creates IRC § 965 PTI ** - for 10 / 50 SFCs, no FTCs allowed below 3rd tier IRC §§ 11, 15, and 965(c) and (g) and Prop. Treas. Reg. § & -5

Transition Tax (“TT”) – Computation
Five (5) step process: Determine SFC’s subpart F income Treatment of any distributions made by SFC to another SFC before January 1, 2018 is determined under IRC § 959 SFC’s IRC § 965(a) inclusion is determined Treatment of all other distributions made by the SFC (other than those determined under step 2) is determined under IRC § 959 An amount is determined under IRC § 956 with respect to the SFC and its US shareholders Following each above step, the SFC’s E&P is adjusted to account for each relevant item IRC §§ 965, Notice , and Treas. Reg. §

Transition Tax (“TT”) – Cash Equivalents
The following are examples of cash equivalents: Net accounts receivable Commercial paper, certificates of deposit, and securities of US, state, or foreign government Foreign currency Obligation with a term of less than 1 year Publicly traded stock owned by Specified Foreign Corporations (“SFC”) Commodities representing inventory / supplies Derivatives as cash positions can have positive and negative values netted but not below zero Accounts payable for inventory and supplies, but NOT certain depreciable properties Double counting and double non-counting are prohibited Last year beginning before Jan. 1, 2018 (> Dec. 31, 2017 or Nov. 2, 2017) OR average of 2 years prior to Nov. 2, 2017 – Rule for cash equivalents IRC §§ 965(c)(3) and 1221(a)(1), (2), (4), and (8) , Notice , § 3, I.R.B. 605 at 605, and Treas. Reg. § (f) Definitions generally and -4(f)

Transition Tax (“TT”) – Main Elections
Election by individual US shareholders of SFC to be taxed as corporations Election to make adjustments to basis by reason of IRC § 965(b) (offset E&P with E&P deficits) – Not follow general rule – Notice , § 2. See next slide Paying TT in installments S corporation shareholders US shareholders that are Real Estate Investment Trusts Not to apply Net Operating Loss deduction * Use alternative method for calculating post-1986 E&P (52-53 week year) Each provision has separate detailed rules * – Deductions allocated & apportioned (not deferred) – IRC § 904 & Treas. Reg. § (e)(1)(iv)(B)(1) & (2) No Treas. Reg. §§ or -3 relief for late elections. For basis elections, see Notice , § 2, I.R.B. 604 at 605. [REG , RIN 1545-B051, 83 FR (Oct. 10, 2018)], superseded by Treas. Reg. § (f)(2), 84 FR 1838, at 1887 (Feb. 5, 2019) IRC §§ 11, 172, 961, 962, 965(b), (h), (i), (m), and (n) and Treas. Reg. §§ (b) and -2(a) and (f)(2) and -7 Elections and payment rules

Transition Tax (“TT”) – E&P Deficit Foreign Corporation
E&P deficit of an E&P deficit foreign corporation used to reduce a US shareholder’s IRC § 965(a) inclusion increases the E&P of the E&P deficit foreign corporation in the following year No adjustment (increase) is made to the basis of stock to account for any reduction in a US shareholder’s IRC § 965(a) inclusion, even though the E&P not included in income is treated as IRC 965(b) PTI However, a US shareholder can elect [under final regulations – up to 90 days after issued on Feb. 5, 2019 – May 6, 2019] to the following basis adjustments for SFCs: Basis of DFIC stock is increased by the IRC § 965(b) PTI Basis of E&P deficit foreign corporation is reduced by the US shareholder’s IRC § 965(b) PTI (could result in taxable income, if basis is exhausted, but limit adjustment to existing basis) Basis of stock cannot be less than zero. See Treas. Reg. §§ (c)(2)(i)(B)(1)(ii) & (C)(1)(Ex. 1) & (2)(Ex. 2) & (f)(2)(ii)(B)(1) IRC §§ 961(a) and 965(b), Notice , § 2, I.R.B. 604 at 605, and Treas. Reg. §§ (d)(2) and (f)(2) & (c)(2)(i)

Transition Tax (“TT”) – Installment Payments - Generally
May elect payments due by the due date of tax return without regard to extensions. For calendar year corporations – Generally, installment payments are due April 15: 8% - Each of 2018, 2019, 2020, 2021, and 2022 (40%) * 15% * 20% * 25% * IR (July 16, 2019) IRC § 965(h) and (k) and Treas. Reg. § (b) & (e)(1) & (3) * - For 2017 calendar yr. All 8 installments payments are interest free

Transition Tax (“TT”) – Installment Payments – C Corp.
Acceleration of all remaining TT installment payments regarding C corporation SFC if: Failure to pay any required installment; Liquidation; Sale of substantially all assets, unless buyer enters into agreement with Secretary to be liable for remaining installment payments; Cessation of business; and Any similar circumstance Some acceleration features may not apply, if an understatement is NOT due to negligence, intentional disregard of the statute or regulations, or fraud IRC § 965(h) and Treas. Reg. § (b)(1) and (3)

Transition Tax (“TT”) – Installment Payments – S Corp.
US shareholder of an S corporation SFC can elect to defer TT payment reporting deferred tax liability annually until triggering events, including: Corporation ceases to be an S corporation; Liquidation; Sale of substantially all assets, unless buyer enters into an agreement (w/i 30 days of triggering event) with the Secretary to be liable for remaining installment payments; Cessation of business; Any similar circumstance; Transfer of shares of S corporation (including by reason of death); Joint and several liability of S corporation with shareholders on deferred payments; and Additional special rules regarding S corporations The US shareholder of an S corporation and the S corporation are jointly and severally liable for deferred payments, penalties, and additions to tax – Footnote disclosure in Financial Statements IRC § 965(i) and (j) and Treas. Reg. § (c)

Transition Tax (“TT”) – Instal. Pymnts. – US S/Hs REITS
US shareholder that is a Real Estate Investment Trust (“REIT”) may elect to pay their share of TT in 8 installments. Triggering events for acceleration of TT installments are similar to those of a C corporation Amounts taken into income of a US shareholder that is a REIT in computing TT is not gross income that is taken into account under IRC § 856(c)(2) and (3) to remain eligible as a REIT Special rules apply to US shareholders which are REITs - those rules are not herein discussed IRC §§ 856(c) and 965(c) and (m) and Treas. Reg. § (d)

Transition Tax (“TT”) – Expatriated Entities (Inversions)
Special rules apply to Expatriated Entities (Inversions): If within 10 years of enactment of the Tax Cuts and Jobs Act, Pub. L. No (December 22, 2017) a domestic corporation expatriates, then the untaxed portion (deduction – participation exemption) of a deferred foreign income under IRC § 965(c) is taxed at 35% to a US shareholder with no credits allowed against the increase in tax Possible unfavorable US tax consequences of inversion, other than those from IRC § 965 above noted, also apply to expatriating entities IRC §§ 965(c) and (l) and 7874 and Treas. Reg. § (d)(2) and (e)

Transition Tax (“TT”) – Specified Foreign Corporation (“SFC”)
SFC is defined as: Any Controlled Foreign Corporation (“CFC”) and Any Foreign Corporation with respect to which 1 or more domestic corporations is a US shareholder (≥ 10% of voting power or value) [treated like a CFC for taking into account subpart F income] – See Rev. Proc CFC – US shareholders have > 50% of voting power or value of corporation with both up and down chain for ownership attribution from foreign corporations – downward ownership attribution from a foreign person is now permitted – Old IRC § 958(b)(4) was repealed by Pub. L. No , § 14213(a)(1) – (2) SFC is NOT a Passive Foreign Investment Company (“PFIC”) IRC §§ 951(b), 957, 958, 965(e), & 1297 & Treas. Reg. § (d) & (f)(45)

Transition Tax (“TT”) – SFC - Types
SFC are defined differently by E&P: Deferred Foreign Income Corporation (“DFIC”) = Accumulated post-1986 deferred foreign income of more than zero (0) = Post-1986 E&P, excluding ECI and PTI E&P Deficit Foreign Corporation (“EPDFC”) = Post-1986 E&P deficit, including ECI, PTI, and other E&P Neither = Not a DFIC and not an EPDFC If a corporation is both a DFIC and EPDFC, then it is deemed to be a DFIC IRC § 965(b)(3)(B) and (d) & Treas. Reg. § (f)(17) and (22)

Transition Tax (“TT”) – Affiliated Groups
All members of the consolidated group that are US shareholders of an SFC are treated as a single US shareholder for purposes of: IRC § 965(b) (E&P deficit offset rule) IRC § 965(h), (k), and (n) relating to the election to pay the IRC § 965 net tax liability in installments, the extended statute of limitations, and the election to forgo the use of net operating losses However, all members of a consolidated group are NOT treated as a single US shareholder for certain other purposes, including for purposes of determining: the amount of any member’s inclusion (may limit use of E&P deficits) or the foreign income taxes deemed paid (may limit use of FTCs) IRC §§ 951, 958, and 965, Notice , § 3, I.R.B. 604 at 605, and Treas. Reg. § (b)(2), -7, and -8

Transition Tax (“TT”) – Individuals – Taxed as Corporations
Individual US shareholders who are required to pay tax on their share of DFIC income can elect to be taxed as domestic corporations (receiving benefit of indirect FTCs) Election permits an IRC 965(c) deduction to individual US shareholders, but no other deductions Election to pay IRC § 965 TT liability in installments is available to individuals, but IRC § 1411 tax on TT related net investment income cannot be paid in installments Basis increased in shares for tax paid on Gross Income inclusions – Distributions of E&P on G.I. inclusion exceeding tax paid on G.I. inclusion are included in G.I. – Distributions exceeding E&P are recoveries of tax basis & those exceeding tax basis = gain from sale or exchange of property [No tax basis in shares for taxed post-1986 E&P, unless individual pays tax] Election is based on IRC § 962 enacted by Revenue Act of 1962 with some minor amendments See IRC § 1248(b)(1) and (d)(1) for FTC & E&P for sales by an individual of a CFC IRC §§ 11, 961, 962, 965, and 1411 & Treas. Reg. §§ (b) & -2(a) and (e)(2), (f)(2)(ii)( C), & (h)(1) & -3(e) & (f)(3)

Transition Tax (“TT”) – Anti-Abuse Rule
The Anti-Abuse Rule can apply, even if the reduction in an IRC § 965 tax liability is offset by an increase in TT pursuant to another provision Accounting method changes reducing TT are subject to the Anti-Abuse Rule even if the change is to go from an impermissible method of accounting to a permissible method of accounting, such as the Alternative Depreciation System for Certain Property (“ADS”), e.g. used predominantly outside the US The Anti-Abuse Rule prohibits certain elections to become a disregarded entity The Anti-Abuse Rule prohibits certain changes in accounting periods The Anti-Abuse applies on a SFC-by-SFC basis (and year-by-year) IRC §§ 168(g)(1)(A), 951, 958, and 965 and Treas. Reg. §

Transition Tax (“TT”) – E&P Inclusion
1 / 2 USP = US Parent FS 1 = Foreign Subsidiary 1 (France) FS 2 = Foreign Subsidiary 2 (Germany) FS 3 = Foreign Subsidiary 3 (United Kingdom) Post-1986 E&P = Earnings & Profits Accumulated after 1986 ECI – Effectively Connected Income - Previously Taxed in US PTI = Previously Taxed Income – Previously Taxed in US Other E&P = Post-1986 E&P (Deficit) Not Previously Taxed in US TT is assessed on the post-1986 E&P of a ≥ 10% owned Specified Foreign Corporation that has not been previously taxed in US minus post-1986 E&P IRC § 965 and Treas. Reg. § (g) and USP (United States) FS 1 (France) FS 2 ** (Germany) FS 3 (United Kingdom) Post-1986 E&P: ECI 5 PTI 10 Other E&P 50 Total E&P 65 Post-1986 E&P: ECI 15 PTI 20 Other E&P (15) Total E&P 20 No E&P Deficit Post-1986 E&P: ECI 1 PTI 19 Other E&P (35) E&P (Defic.)(15) * Yes E&P Deficit * - EPDFC Includes Hovering Deficit with-out FTC Deferred Foreign Income Corporation ** - Neither a DFIC nor a E&P Deficit Foreign Corporation 44 -2(d)

Transition Tax (“TT”) – E&P Inclusion
2 / 2 TT is assessed on the post-1986 E&P of a ≥ 10% owned Specified Foreign Corporation (“SFC”) that has not been previously taxed in US minus post-1986 E&P Computation of TT to USP for Calendar Year 2017 Based on Net Post-1986 E&P Not Previously Taxed in US: FS 1 (DFIC) 50 FS 2 (Neither) ** 0 FS 3 (EPDFC) * (15) TT Base 35 (A) TT Tax Computation: Cash (Includes 15.5% X 15 = % X 20 = TT (A) TT is Payable in 1 Payment or in 8 Installment Payments IRC § 965 and Treas. Reg. § (g) and USP (United States) FS 1 (France) FS 2 ** (Germany) FS 3 (United Kingdom) Post-1986 E&P: ECI 5 PTI 10 Other E&P 50 Total E&P 65 Post-1986 E&P: ECI 15 PTI 20 Other E&P (15) Total E&P 20 No E&P Deficit Post-1986 E&P: ECI 1 PTI 19 Other E&P (35) E&P (Defic.)(15) * Yes E&P Deficit * - EPDFC Includes Hovering Deficit with-out FTC Deferred Foreign Income Corporation ** - Neither a DFIC nor a E&P Deficit Foreign Corporation -2(d)

TT - IRC § 965 - Taxation of Distributions
IRC § 959(c)(2) – IRC § 965(a) PTI – Previously Taxed Income (“PTI”) from TT income (net of E&P deficits) = IRC § 961 tax basis – IRC § 986(c) applicable IRC § 959(c)(2) – IRC § 965(b) PTI – PTI from TT linking IRC § 965(a) PTI to E&P deficits ≠ IRC § 961 tax basis – IRC § 986(c) NOT applicable IRC § 245A – IRC § 965(c) – Participation exemption from TT – Deductions resulting in reduced rates of tax on distributions – Cash & equivalents E&P % and other E&P 8% - Not taxed when distributed ≠ IRC § 961 tax basis – IRC § 986(c) NOT applicable – No FTC or deduction for WHT on distributions IRC §§ 245A, 951, 951A, 954, 956, 959, 961, and 986(c) and Treas. Reg. §§ and -7

Transition Tax (“TT”) – Limited Use of Foreign Tax Credits
FTCs related to TT IRC § 965(a) inclusions should be subject to IRC §§ 861 through 865 and the regulations thereunder for allocating and apportioning deductions to separate categories of income described in IRC § 904(d)(1). No IRC 965(a) inclusions should be considered to create exempt income or exempt assets. This is so even though IRC § 965(a) inclusions have been reduced by deductions under IRC § 965(b) from E&P Deficit Foreign Corporations and by deductions under IRC § 965(c), which result in a net tax on cash and equivalents E&P of 15.5% and of 8% on other E&P. IRC §§ 861 – 865, 904(d)(1), and 965 and Treas. Reg. § (m) and -6 and Prop. Treas. Reg. § with preface and Prop. Treas. Reg. §§ , -2, -3, -4, -5, and -6

Transition Tax (“TT”) – State Income Tax
1 / 5 States differ – Rolling or current adoption of Federal tax law State law may assess TT as Subpart F income or dividend Tax forms may or may not address TT State income usually starts with Form 1120, Line 28 or 30 TT is an attachment to Form 1120 – Not on Line 28 or 30 Pennsylvania taxes dividends – including the net IRC § 965 inclusion, but subject to a Dividends Received Deduction (“DRD”)

TT – State Income Tax – Major Grouping Summary
2 / 5 Effective Dec. 22, 2017, P.L , the 2017 tax act, amends I.R.C. § 965 to impose a mandatory tax on post-1986 accumulated foreign earnings. These post-1986 earnings are reported on IRC Form 965 Transition Tax Statement and do not flow through to page 1 of the federal Form This treatment represents a unique situation for state income tax purposes. Of the 50 states and the District of Columbia, 5 do not impose an income tax. Of the remaining 46, 6 have issued no guidance with regard to IRC § 965 income. Those states are: Not revised since August 16, 2019

3 / 5 15 states either do not conform to the changes under IRC Section 965 or have issued guidance instructing taxpayers to exclude 965 repatriated earnings from the taxable income computation entirely. Those are: Not revised since August 16, 2019 9 states will include the net 965 income in their calculation. The net 965 income will be subject to some form of DRD in that state. Those states are: Not revised since August 16, 2019

4 / 5 12 states will include only the gross 965 earnings. The gross earnings will be subject to some form of DRD in that state: Those states are: Not revised since August 16, 2019 3 states include 965 earnings with no DRD. These states are: Not revised since August 16, 2019 *** - Colorado allows offset thru foreign source income exclusion **** - Vermont offers a foreign dividend subtraction modification, however, guidance does not indicate whether 965 earnings will qualify for this.

TT – State Income Tax – State by State Summary
5 / 5 Not revised since August 16, 2019

Transition Tax (“TT”) – Form 965
Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System (Filed in 2019 for 2017 amounts) Schedule A – U.S. Shareholder’s Section 965(a) Inclusion Amount Schedule B – Deferred Foreign Income Corporation’s Earnings & Profits (E&P) Schedule C – U.S. Shareholder’s Aggregate Foreign Earnings & Profits Deficit Schedule D – U.S. Shareholder’s Aggregate Foreign Cash Position Schedule E – U.S. Shareholder’s Aggregate Foreign Cash Position - Detail Schedule F – Foreign Taxes Deemed Paid by Domestic Corporation (for US shareholder’s 2017 tax year) Schedule G - Foreign Taxes Deemed Paid by Domestic Corporation (for US shareholder’s 2018 tax year) Draft IRS Form 965 Instructions (Rev. Jan. 2019) (Released Dec. 12, 2018) (Released Aug. 30 and Sept. 5, 2018)

Transition Tax (“TT”) – Form 965
Form 965-A – Individual Report of Net 965 Tax Liability [has an S Corp. section] (released Oct. 9, 2018) Form 965 – Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System (Filed in 2019 for 2017 amounts) Schedule A – U.S. Shareholder’s Section 965(a) Inclusion Amount Schedule B – Deferred Foreign Income Corporation’s Earnings & Profits (E&P) Schedule C – U.S. Shareholder’s Aggregate Foreign Earnings & Profits Deficit Schedule D – U.S. Shareholder’s Aggregate Foreign Cash Position Schedule E – U.S. Shareholder’s Aggregate Foreign Cash Position - Detail Schedule F – Foreign Taxes Deemed Paid by Domestic Corporation (for US shareholder’s 2017 tax year) Schedule G - Foreign Taxes Deemed Paid by Domestic Corporation (for US shareholder’s 2018 tax year) (Released Aug. 30 and Sept. 5, 2018, except Form 965-A)

Transition Tax (“TT”) – Notices
1 / 2 Notice , I.R.B. 317 and IR – Foreign Cash Position, Accumulated Post-1986 Deferred Foreign Income, Basis Increases for Amounts Treated as Subpart F Income under IRC § 965, Affiliated Group Making a Consolidated Return, & Foreign Currency Gain or Loss under IRC § 986(c). Notice , I.R.B. 341 and IR – SFC as a Deferred Foreign Income Corp. (“DFIC”) or an E&P Deficit Foreign Corporation, Alternative Method for Calculating Post E&P, Treatment of Deficits, Aggregate Foreign Tax Position, & Translation Rules. Notice (IR ), I.R.B. 480 – IRC § 318(a)(3)(A) to Treat a Foreign Corporation as a SFC, Cash Measurement Dates of a SFC with Respect to a US Shareholder, Treatment of Certain Accrued Foreign Income Taxes for Purposes of Determining Post E&P, Prevention of the Reduction of TT Liability of a US Shareholder, Rules Related to Elections, Reporting, and Payment, & Treatment of IRC § 965(c) Deduction for Purposes of IRC §§ 62(a) and 63(d). IRC §§ 62(a), 63(d), 318(a)(3)(A), 961, 965, and 986(c) and IR

Transition Tax (“TT”) – Notices
2 / 2 Notice , § 2, I.R.B. 604 at 605 – Proposed § (f)(2) allows a section 958(a) U.S. shareholder (as defined in proposed § (f)(33)) to elect to make certain basis adjustments with respect to each deferred foreign income corporation (as defined in proposed § (f)(17)) and each E&P deficit foreign corporation (as defined in proposed § (f)(22)) (such election, the “basis election”). Proposed § (f)(2)(iii)(B)(1)(i) provides the general rule that the basis election must be made no later than the due date (taking into account extensions, if any) for the section 958(a) U.S. shareholder’s return for the first taxable year that includes the last day of the last taxable year of a deferred foreign income corporation or E&P deficit foreign corporation of the section 958(a) U.S. shareholder that begins before January 1, If the due date referred to in proposed § (f)(2)(iii)(B)(1)(i) occurred before September 10, 2018, proposed § (f)(2)(iii)(B)(1)(ii) (the “transition rule”) provides that the basis election must be made by October 9, The final regulations will provide that the transition rule will apply with respect to returns due (determined with regard to any extension) before the date that is 90 days after the date that the final regulations are published and that in such cases the basis election must be made no later than 90 days after the publication of the final regulations in the Federal Register. In addition, the final regulations will provide that if a basis election was made on or before the date the final regulations are published, the basis election may be revoked no later than 90 days after the publication of the final regulations in the Federal Register. Relevant tax returns must be filed consistently with an election that has been made and not revoked. [REG , RIN 1545-B051, 83 Fed. Reg. __ (Oct. 10, 2018)]

Transition Tax (“TT”) – Final Treasury Regulations
§ Limitation of tax for individuals on amounts included in gross income under section 951(a). [also issued under 26 U.S.C. 965(o).] § (a) Election of limitation of tax for individuals Who may elect. § Outline of section 965 regulations. § Overview, general rules, and definitions. [also issued under 26 U.S.C. 965(c)(3)(B)(iii)(V), 965(d)(2), 965(o), 989(c), and 7701(a).] § Adjustments to earnings and profits and basis. [also issued under 26 U.S.C. 965(b)(3)(A)(ii), 965(o), and 961(a) and (b).] § Section 965(c) deductions. [also issued under 26 U.S.C. 965(c)(3)(D) and 965(o).] § Disregard of certain transactions. [also issued under 26 U.S.C. 965(c)(3)(F) and 965(o).] § Allowance of a credit or deduction for foreign income taxes. [also issued under 26 U.S.C. 965(o) and 26 U.S.C. 902(c)(8) (as in effect on December 21, 2017).] § Computation of foreign income taxes deemed paid and allocation and apportionment of deductions. [also issued under 26 U.S.C. 965(o) and 26 U.S.C. 902(c)(8) (as in effect on December 21, 2017).] § Elections, payment, and other special rules. [also issued under 26 U.S.C. 965(h)(3), 965(h)(5), 965(i)(2), 965(i)(8)(B), 965(m)(2)(A), 965(n)(3), and 965(o).] § Affiliated groups (including consolidated groups). [also issued under 26 U.S.C. 965(o).] § Applicability dates. [also issued under 26 U.S.C. 965(o).] §1.986(c)-1 Coordination with section 965. [also issued under 26 U.S.C. 965(o).] - IRC § 965 & Treas. Reg. § (c). 305 pages with Preamble when released – Jan 15, 2019 78 pages as sent to the Federal Register – Feb. 5, 2019 3 pages – Correction – April 10, 2019 T.D. 9846, [ p], REG , RIN 1545-BO51, 84 FR 1838

Transition Tax (“TT”) – Proposed Treasury Regulations
§ Limitation of tax for individuals on amounts included in gross income under section 951(a) § Election of limitation of tax for individuals § Outline of section 965 regulations § Overview, general rules, and definitions § Adjustments to earnings and profits and basis § Section 965(c) deductions § Disregard of certain transactions § Allowance of credit or deduction for foreign income taxes § Computation of foreign income taxes deemed paid and allocation and apportionment of deductions § Elections and payment rules § Affiliated groups (including consolidated groups) § Applicability dates §1.986(c)-1 Coordination with section IRC § 965 & Treas. Reg. § (c). 249 pages with Preamble when released – Aug. 1, 2018 62 pages as sent to the Federal Register – Aug. 9, 2018 [ p], REG , RIN 1545-BO51

Transition Tax (“TT”) – Revenue Procedures
Rev. Proc , I.R.B. 384 – SFC seeking to change its taxable year that ends of December 31, A week taxable year is deemed to begin on the first day of the calendar month nearest to the first day of the week taxable year, and is deemed to end or close on the last day of the calendar month nearest to the last day of the week taxable year. Rev. Proc , I.R.B Regulated Investment Companies (“RICs”) owning ≥ 10% of SFC with deferred foreign income from November and December 2017 can treat it as arising in 2018 for excise tax purposes. This is because the excise tax on undistributed earnings is calculated on a calendar basis for most types of income, but capital gains and other types of unpredictable income are calculated on an October 31 year-end basis. IRC §§ 852, 951, 965, 988, 1296, 4982 & Treas. Reg. § (c) and IR

Transition Tax (“TT”) – Publication 5292
1 / 2 Publication 5292, How to Calculate Section 965 Amounts and Elections Available to Taxpayers – For use in preparing 2017 Returns. Apr. 06, 2018 – Worksheet 1.1 – 965 Workbook: Part I – Section 965(a) Inclusion Part II – Section 965( c) Deduction Worksheet A – US Shareholders IRC § 965(a) Amount; Worksheet B – DFIC E&P; Worksheet C – US Shareholder’s Aggregate Foreign E&P Deficit; Worksheet D – US Shareholder’s Aggregate Foreign Cash Position; Worksheet E – US Shareholder’s Aggregate Cash Position – Detail; Worksheet F (Omitted); Worksheet G – Foreign Taxes Deemed Paid by Domestic Corporation for 2017 Tax Year; & Worksheet H, Section 1 Disallowance of FTC and Amounts Reported on Forms 1116 and 1118 IRC § 965

Transition Tax (“TT”) – Publication 5292
2 / 2 Worksheet 2.1 – 965 Deferral Worksheet for Individuals: Part I – Report of Net 965 Tax Liability and Election to Pay in Installments Part II – Record of Amount of Net 965 Tax Liability Paid by the Taxpayer Worksheet 2.2 – 965 Deferral Worksheet for Individuals: Part III – S Corporation Shareholder Computation of Net 965 Tax Liability Related to 965 Related Amounts Worksheet 2.3 – 965 Deferral Worksheet for Individuals: Part IV – Annual Report of Deferred net 965 Tax Liability related to 965 Inclusions from S Corporations Worksheet 3.1 – 965 Deferral Worksheet for Corporations: Part I - Report of Net 965 Tax Liability and Election to Pay in Installments Part III – Real Estate Investment Trust Deferral of Net Section 965(a) Inclusion IRC § 965

Transition Tax (“TT”) – Frequently Asked Questions
1 / 5 Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns related-to-section-965-on-2017-tax-returns Updated: 03/13/2018 & 04/13/2018 Q1. Who is required to report amounts under section 965 of the Code on a 2017 tax return? Q2. How are amounts under section 965 of the Code reported on a 2017 tax return? Q3. Is there any other reporting in connection with section 965 of the Code required on a 2017 tax return? Q4. What elections are available with respect to section 965 of the Code on a tax return? Q5. Who can make an election with respect to section 965 of the Code on a 2017 tax return? Q6. When must an election with respect to section 965 of the Code be made? IRC § 965

2 / 5 Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns related-to-section-965-on-2017-tax-returns Updated: 03/13/2018 & 04/13/2018 Q7. How is an election with respect to section 965 of the Code made on a 2017 tax return? Q8. Is a Form 5471 with respect to all specified foreign corporations with respect to which a person is a United States shareholder required to be filed with the person’s tax return, regardless of whether the specified foreign corporations are CFCs? Q9. Are domestic partnerships, S corporations, or other passthrough entities required to report any additional information to their partners, shareholders, or beneficiaries in connection with section 965 of the Code? Q10. How should a taxpayer pay the tax resulting from section 965 of the Code for a tax return? IRC § 965

3 / 5 Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns related-to-section-965-on-2017-tax-returns Updated: 03/13/2018 & 04/13/2018 Q11. If not already filed, when should an individual taxpayer electronically file a tax return? Q12. If a person has already filed a 2017 tax return, what should the person do? Q13. How will the IRS apply 2017 estimated tax payments (including credit elects from 2016) to a taxpayer’s net tax liability under section 965? Q14. If a taxpayer’s 2017 payments, including estimated tax payments, exceed its net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h), may the taxpayer receive a refund of such excess amounts or credit such excess amounts to its 2018 estimated income tax? [Also, see PMTA (Aug. 2, 2018)] IRC § 965

4 / 5 Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns related-to-section-965-on-2017-tax-returns Posted: 06/04/2018 Q15: If a taxpayer that has made a section 965(h) election for 2017 filed a income tax return that calculated an overpayment without including the taxpayer’s total net tax liability under section 965, and the taxpayer attempted to elect to credit the calculated overpayment to its estimated tax liability for 2018, will the IRS determine an addition to tax for an underpayment of taxpayer’s 2018 estimated taxes because the credit elect won’t be available for the first required 2018 estimated tax installment? Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay? Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section 965(h)(3)? IRC § 965

5 / 5 Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns related-to-section-965-on-2017-tax-returns Q17: If an individual has filed his or her 2017 tax return, but has not made the section 965(h) election, may the individual file another 2017 return on which he or she makes the election? Posted: 06/04/2018 Appendix: Q&A - 2 Individual Taxpayer - Updated: 04/13/2018 S corporation or Partnership Taxpayer - Updated: 04/13/2018 Estate or Trust Taxpayer – Posted: 3/18/18 & Updated: 04/13/2018 Form 1120 Corporate Taxpayer - Posted: 03/13/18 Exempt Organization Taxpayer - Posted: 03/13/18 IRC § 965 – Last Reviewed or Updated: 08-Oct-2018

1 / 4 Questions and Answers about Reporting Related to Section 965 on 2018 Tax Returns reporting-and-payments-arising-under-section-965 Updated: 12/12/2018 Q1: I made a section 965(h) election on my 2017 tax return, electing to pay the section 965(h) net tax liability portion of my 2017 income tax liability in eight annual installments. How was the section 965(h) net tax liability portion of my 2017 income tax liability assessed and how do I make the second installment payment? Q2: I made a section 965(h) election on my 2018 tax return, electing to pay the section 965(h) net tax liability portion of my 2018 income tax liability in eight annual installments. How is the section 965(h) net tax liability portion of my 2018 income tax liability assessed and how do I make the first installment payment? IRC § 965

2 / 4 Questions and Answers about Reporting Related to Section 965 on 2018 Tax Returns reporting-and-payments-arising-under-section-965 Updated: 12/12/2018 Q3: I made a section 965(h) election for the 2017 tax year and have an unsatisfied but properly deferred payment obligation for my 2017 section 965(h) net tax liability. My 2018 income tax payments, including estimated tax payments, exceed my 2018 tax year income tax liability and I have also fully paid all of my 2017 section 965(h) net tax liability annual installment payment obligations that are due. May I receive a refund of, or credit to my 2019 tax year, my 2018 income tax overpayment? IRC § 965

3 / 4 Questions and Answers about Reporting Related to Section 965 on 2018 Tax Returns reporting-and-payments-arising-under-section-965 Updated: 12/12/2018 Q4: I made a section 965(h) election on my 2018 tax return. If my 2018 payments, including estimated tax payments, exceed my 2018 net income tax liability described under section 965(h)(6)(A)(ii) (my net income tax determined without regard to section 965) and my first annual installment (due in 2019) pursuant to an election under section 965(h), may I receive a refund of such excess amounts or credit such excess amounts to my 2019 estimated income tax? IRC § 965

4 / 4 Questions and Answers about Reporting Related to Section 965 on 2018 Tax Returns reporting-and-payments-arising-under-section-965 Updated: 12/12/2018 Q5: I made a section 965(h) election on my 2018 tax return. How will the IRS apply my 2018 estimated tax payments (including amounts elected to be applied as a credit against estimated tax from the 2017 tax year) to my 2018 net tax liability under section 965? Q6: I reported income under section 965 on either my 2017 or 2018 tax returns (or both). What forms am I required to complete and attach to my 2018 income tax return? IRC § 965

Overview – Global Intangible Low–Taxed Income (“GILTI”)
GILTI - Theory GILTI and Subpart F Subpart F Recaptured – Same Category of Income GILTI – IRC § 951A(c)(2) – Tested Income or (Tested Loss) GILTI – Similar to Subpart F, But Different GILTI GILTI Computation GILTI Deductions – Same Category of Income 50% of GILTI Deduction Limiters 37.5% of FDII and 50% of GILTI Ded. GILTI, GILTI Ded. & FDII Ded. – St. Inc. Tax – St. by St. Sum. GILTI and Qualified Business Asset Investment (“QBAI”) GILTI & QBAI – Consider Accounting Method Change GILTI – QBAI – Availability GILTI & QBAI – Dual Use Property GILTI & QBAI – Short Taxable Years GILTI & QBAI – Anti-Abuse Rules for Certain Transfers of Property GILTI & QBAI – QBAI Exceeds 10 Times Tested income GILTI & QBAI – Specified Interest Exp. 1 / 2

Overview – Global Intangible Low–Taxed Income (“GILTI”)
Single Definition of Int. Exp. – GILTI & Business Int. Exp. GILTI & Pro Rata Share Rules GILTI & Basis for Tested Loss CFCs GILTI and FTCs GILTI & Reporting Requirements GILTI – Deemed Payments under IRC § 367(d) GILTI thru Domestic & Foreign Partnerships Notice GILTI thru Domestic Partnerships Ordering of E&P upon Distribution & Reclassification GILTI Consolidated Computations GILTI, GILTI Ded. & FDII Ded. – St. Inc. Tax – St. by St. Sum. GILTI Forms GILTI – Final Treasury Regulations GILTI – Proposed Treasury Regulations 2 / 2

Global Intangible Low-Taxed Income (“GILTI”) - Theory
Theory - Can avoid GILTI, if pay foreign country taxes of at least % (16.4% after 2025) – 80% creditable netting to 10.5% Reality – A corporation can owe US tax on GILTI even though its foreign effective tax rate is above % because of GILTI’s interaction with existing expense allocation and apportionment rules, which limit FTCs a company can claim to offset taxable foreign source income For tax consolidated groups, the GILTI tax obligation is computed on a consolidated basis Applies to taxable years beginning after December 31, 2017 Caveat: When proposed regulations are final, may elect GILTI HTE (> 18.9%). IRC §§ 250, 861 – 865 [old law], 951A, and 954(b)(4); Act § 14201(d); and Treas. Reg. §§ with preface and Prop. Treas. Reg. §§ 1.951A-1(e)(2) & (4) & -7 & and Prop. Treas. Reg. § 1.951A-2(c)(6).

GILTI and Subpart F GILTI and Subpart F are two separate tracks of taxation GILTI borrows many subpart F concepts – Treats CFC as a domestic corporation for computing gross income, taxable income, & pro rata share of hypothetical year-end distributions, but no GILTI HTE When recapturing suspended subpart F losses due to E&P deficit limitations (including the qualified deficit and chain deficit rules) under IRC § 952(c), both GILTI tested income and Subpart F income can result in tax based on the same positive E&P GILTI is computed by individual tax period and is not limited by E&P Subpart F is based on E&P, which can be measured over multiple tax periods IRC §§ 951(a)(2), 951A, 952(c), and 954(b)(4) and Treas. Reg. §§ (b) and (e), (f)(1) & -2, and 1.954(d)(5) and Prop. Treas. Reg. §§ 1.951A-1(d)(1), -2(c)(4) and (6) and -6(d)

Subpart F Recaptured – Same Category of Income
IRC § 952(c)(2) provides that, to the extent subpart F income is reduced by reason of the E&P limitation in any taxable year, any excess of the E&P of the corporation for any subsequent taxable year over the subpart F income for that year is recharacterized as subpart F income. See also Treas. Reg. § (f)(1). An amount recaptured under IRC § 952(c)(2) is treated as subpart F income in the same separate category (as defined in Treas. Reg. § (a)) as the subpart F income that was subject to the E&P limitation in a prior taxable year. See Treas. Reg. § (f)(2)(ii). IRC §§ 904 and 952(c) and Treas. Reg. §§ (a) and (f)(1) and (2)(ii)

GILTI – IRC § 951A(c)(2) - Tested Income or (Tested Loss)
IRC § 951A(c)(2)(A) or (B) - Tested Income or (Tested Loss): IRC § 951A(c)(2)(A)(i) or (B) - Gross Income XXX IRC § 951A(c)(2)(A)(i) or (B) - Exclusions from Gross Income: Effectively Connected Income with U.S. Trade or Business – IRC § 952(b), Gross income taken into account in determining Subpart F income, Gross income excluded from FBCI (IRC § 954) or the insurance income (IRC § 953) solely by reason of an election made under IRC § 954(b)(4) and Treas. Reg. § (d)(5) (High Tax Exception (“HTE“) (> 18.9%)), Dividends received from related persons (IRC§ 954(d)(3)), and Foreign oil and gas extraction income (IRC § 907(c)(1)) IRC § 951A(c)(2)(A)(ii) or (B) - Deductions (Including Taxes) Properly Allocable to Such Gross Income - Similar to IRC § 954(b)(5) (XXX) IRC § 951A(c)(2) - Tested Income or (Tested Loss) for Named CFC XX Prop. Treas. Reg. § 1.951A-2(c)

GILTI – Similar to Subpart F, But Different
Subpart F income inclusions by a US shareholder are made on a separate CFC by separate CFC basis – solely at the level of each CFC GILTI inclusions by a US shareholder are made by combining GILTI tax attributes of all of a US shareholder’s CFCs – solely at the level of the US shareholder GILTI tax attributes include tested income, tested loss, specified tangible property, and specified interest expense [based on interest expense and interest income] of each CFC owned by the US shareholder at the US shareholder level Tested income and tested loss are determined without regard to the E&P limitation in IRC § 952(c) IRC §§ 951 and 951A and proposed treasury regulations Preamble, Special Analyses, Regulatory Planning and Review – Economic Analysis, B. Economic Analysis of the Proposed Regulations, 1. Background & Prop. Treas. Reg. § 1.951A-6

Global Intangible Low-Taxed Income (“GILTI”)
CFC tested gross income, less related deductions, equals CFC Tested Income Less CFC related deductions, less tested gross income, equals CFC Tested Loss Equals Net CFC Taxable Income Net Deemed Tangible Income Return (“NDTIR”) [Only for CFCs with Tested Income] (10% of Qualified Business Asset Investment (“QBAI”), less certain interest expense) Equals GILTI Multiply GILTI times 50%, equals 50% of GILTI deduction with certain limiters IRC §§ 250 and 951A

GILTI Computation Controlled Foreign Corporation (“CFC”) Tested Gross Income (“TGI”) (IRC § 951A(c)(2)(A)(i)) Minus Deductions (Including Taxes) (Similar to IRC § 954(b)(5)) (IRC § 951A(c)(2)(A)(ii)) CFC Tested Income (“TI”) (IRC § 951A(c)(1)(A)) [A – B] Deductions (Including Taxes) (Similar to IRC § 954(b)(5)) (IRC § 951A(c)(2)(B)(i)) Minus CFC TGI (IRC § 951A(c)(2)(B)(i)) CFC Tested Loss (IRC § 951A(c)(1)(B)) [D – E] Net CFC TI (IRC §951A(c)(1)) [C – F] Qualified Business Asset Investment (“QBAI”) – CFC Quarterly Average of Depreciable Assets under IRC § 167 Specified Tangible Property with Adjusted Basis Determined under IRC § 168(g) Alternative Depreciation System (“ADS”) (IRC § 951A(d)) QBAI X 10% (IRC § 951A(b)(2)(A)) [H X 10%] Minus Interest Expense Related to CFC TI (IRC § 951A(b)(2)(B)) [General Rule – But Not Always Deductible from QBAI] Net Deemed Tangible Income Return (“NDTIR”) (IRC § 951A(b)(2)) – (No deduction for NDTIR [K], unless CFC TI [C] is positive) [I – J] GILTI - Excess of Net CFC TI Minus NDTIR (IRC § 951A(b)(1)) [G – K] 50% of GILTI Deduction– Lesser of (a) 50% of GILTI % of Foreign Derived Intangible Income (“FDII”) or (b) 50% of Taxable Income before GILTI and FDII Deductions, Assuming FDII is 0 (IRC § 250) [50% X L] Treas. Reg. §§ 1.951A-1(c) and (d), -2, -3, and -4 and

GILTI Deductions – Same Category of Income
The proposed regulations provide that allowable deductions are allocated and apportioned to gross tested income under the principles of IRC § 954(b)(5) and Treas. Reg. § (c), by treating gross tested income within a single category (as defined in Treas. Reg. § (a)) as a single item of gross income, in addition to the items in Treas. Reg. § (c)(1)(iii). See Prop. Treas. Reg. § 1.951A-2(c)(3). The final regulations clarify that losses in other categories of income (such as FBCI) cannot reduce gross tested income, and that tested losses cannot reduce other categories of income. See Treas. Reg. § 1.951A- 2(c)(3). IRC §§ 904 and 954(b)(5) and Treas. Reg. §§ (a), 1.951A-2(c)(3), and (c)(1)(iii) and Prop. Treas. Reg. § 1.951A-2(c)(3)

50% of GILTI Deduction Limiters
GILTI is assessed annually with no GILTI US tax attribute (especially FTCs) C/B to prior years or C/O to future years. A deduction is permitted for 50% of GILTI, which cannot exceed the lesser of (a) 50% (37.5% after 2025) of GILTI and 37.5% (21.875% after 2025) of Foreign Derived Intangible Income (“FDII”) or (b) 50% of taxable income before the GILTI and FDII deductions, assuming that there is no FDII. The deductions permitted for 50% of GILTI and 37.5% of FDII are provided under IRC § 250 and are permitted only in the current year (year in which they occur with no C/B and with no C/O). GILTI and FDII deductions are available only for US C corporations (and individuals electing to be taxed as US C corporations), (not available for individuals, S Corporations, RICs, or REITs). FDII is discussed on subsequent slides.

37.5% of FDII and 50% of GILTI Deductions
Foreign Derived Intangible Income (“FDII”) X 37.5% = FDII Deduction (Global Intangible Low-Taxed Income (“GILTI”) + IRC § 78 gross-up) X 50% = GILTI Deduction Total IRC § 250 Deduction IRC § 250 deduction for FDII and GILTI is limited to taxable income of a domestic corporation (calculated without regard to the IRC § 250 deduction, but with regard to a deduction for an NOL carryover under IRC § 172(a)) IRC § 250 deductions are taken into account in computing taxable income for interest expense deductions limits under IRC § 163(j) [may add back GILTI deduct.] IRC §§ 78, 163(j), 250, and 960(d) & Prop. Treas. Reg. §§ & 1.250(a)-1

GILTI, GILTI Ded. & FDII Ded. – St. Inc. Tax – St. by St. Sum.

GILTI & Qualified Business Asset Investment (“QBAI”)
1 / 8 A Tested income CFC’s QBAI for any taxable year is the average for the CFC’s aggregate adjusted bases as of the close of each quarter in specified tangible property that is used in a trade or business of the CFC and of a type with respect to which a depreciation deduction is allowable under IRC § 167(a). QBAI determined at the close of each quarter of the partnership’s taxable year that ends with or within the CFC’s taxable year. The adjusted basis in any property is determined by using the Alternative Depreciation System (“ADS”) under IRC §168(g) from the date placed in service and allocating the depreciation deduction with respect to the property ratably to each day during the period in the taxable year to which the depreciation relates. ADS applies for purposes of determining QBAI irrespective of whether the basis of the property is determined using another depreciation method for other purposes of the IRC. IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and -3

1 / 8 B The definition of specified tangible property excludes items typically considered intangible property — namely computer software, qualified film or television productions, and qualified live theatrical productions. A transition rule is provided for taxpayers that were not calculating, and were not required to calculate, their QBAI adjusted basis using ADS. Under the transition rule, taxpayers may elect to continue to depreciate property that was placed in service before a CFC's first tax year beginning after December 22, 2017, using the same method the CFC used for purposes of determining income under Treas. Reg. § If making the election, controlling domestic shareholders must attach a statement meeting the requirements of Treas. Reg. § (c)(3)(ii) with their income tax returns following the notice requirements of Treas. Reg. § (c)(3)(iii). IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and -3, , and (c)(3)(ii) and (iii)

1 / 8 C ADS applies to determine the adjusted basis in property for purposes of determining QBAI regardless of whether the property was placed in service before the enactment of IRC § 951A, or whether the basis in the property is determined under another depreciation method for other purposes of the IRC. See IRC § 951A(d)(3) and Treas. Reg. § 1.951A-3(e)(2). In addition, for purposes of determining income and E&P, a CFC is generally required to use ADS for depreciable property used predominantly outside the United States. See IRC § 168(g) and Treas. Reg. §§ (c)(2)(ii) and (iv) and (a)(2). However, a CFC may instead use for this purpose a depreciation method used for its books of account regularly maintained for accounting to shareholders or a method conforming to United States generally accepted accounting principles (a “non-ADS depreciation method”) if the differences between ADS and the non-ADS depreciation method are immaterial. See Treas. Reg. §§ (c)(2)(ii) and (iv) and (a)(2). IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3), (d)(1), and (e)(2) and -3, (c)(2)(ii) and (iv), and (a)(2)

1 / 8 D The determination of the adjusted basis in property under section 951A(d) is not a method of accounting subject to the consent requirement of IRC § 446(e). As a result, a CFC does not need the Commissioner’s consent to use ADS for purposes of determining its adjusted basis in specified tangible property in determining its QBAI. The adjusted basis in property is determined based on the cost capitalization methods of accounting used by the CFC for purposes of determining its tested income and tested loss. See Treas. Reg. § 1.951A-3(e)(1). A change to ADS from another depreciation method for purposes of computing tested income or tested loss is a change in method of accounting subject to IRC § 446(e). The Treasury Department and the IRS expect that many CFCs that are not already using ADS for purposes of computing and E&P will change their method of accounting for depreciation to the straight-line method, the applicable recovery period, or the applicable convention under ADS to comply with Treas. Reg. §§ (c)(2)(iv) and (c)(1)(iii)(c) and that most of such changes are already eligible for automatic consent under Rev. Proc , I.R.B Another revenue procedure likely will be published further expanding the availability of automatic consent for depreciation changes and updating the terms and conditions in sections 7.07 and 7.09 of Rev. Proc (related to the source, separate limitation classification, and character of IRC § 481(a) adjustments) to take into account IRC § 951A. After the change in accounting method, the basis in specified tangible property will be the correct basis for purposes of determining income, E&P, and QBAI. IRC §§ 167(a), 168(g), 446(e), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3), (d)(1), and (e)(2) and -3, (c)(2)(ii) and (iv), and (a)(2) and (c)(1)(iii)(c)

1 / 8 E The final regulations provide that a CFC that is not required to use ADS for purposes of computing income and E&P may elect, for purposes of calculating QBAI, to use its non- ADS depreciation method to determine the adjusted basis in specified tangible property placed in service before the first taxable year beginning after December 22, 2017, subject to a special rule related to salvage value. See Treas. Reg. § 1.951A-3(e)(3)(ii). The election also applies to the determination of a CFC’s partner adjusted basis under Treas. Reg. § 1.951A-3(g)(3) in partnership specified tangible property placed in service before the CFC’s first taxable year beginning after December 22, See id. This transition rule does not apply for purposes of determining the foreign-derived intangible income (“FDII”) of a domestic corporation. Cf. IRC § 250(b)(2)(B) (in calculating deemed tangible income return for purposes of FDII, QBAI is generally determined under IRC § 951A(d)). IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3), (d)(1), and (e)(2) and -3, (c)(2)(ii) and (iv), and (a)(2)

GILTI & QBAI – Consider Accounting Method Change
2 / 8 Consider accounting method change for depreciation from an unacceptable method to Alternative Depreciation System (“ADS”) under IRC § 168(g) Compute IRC 481(a) adjustment amount Prepare Form 3115, Application for Change in Accounting Method Rev. Proc , as clarified and modified by Rev. Proc , as modified by Rev. Proc , and as modified by Rev. Proc , provides the general procedures by which a taxpayer may obtain automatic consent of the Commissioner to a change in method of accounting described in the List of Automatic Changes. Rev. Proc , as supplemented by Rev. Proc , contains the current List of Automatic Changes. See also new Rev. Proc [IRC § 451] for automatic method changes and amendments to existing automatic method changes. IRC §§ 167(a), 168(g), 446(e), 451, 481(a), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and -3 & Rev. Procs , , , , &

GILTI - QBAI - Availability
3 / 8 QBAI is available only for CFCs with tested income – Reduced by specified interest expense QBAI is NOT available for CFCs with tested loss Tax Planning – Parent – Subsidiary Relationship: CFC with tested income files a Check-the-Box (“CTB”) election to become a disregarded entity of an entity with tested loss to make CFC with tested loss profitable – Enhance QBAI CFC with tested loss files a CTB election to become a disregarded entity of an entity with tested income to make CFC with tested loss profitable – Enhance QBAI Tax Planning – Brother – Sister Relationship: Mergers of CFCs – Cover CFC tested losses with CFC tested income - Enhance QBAI IRC §§ 167(a), 168(g), 368(a), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and -3

GILTI & QBAI – Dual Use Property
4 / 8 Dual use property produces both gross tested income and gross income that is not gross tested income Dual use ratio for specified tangible property is the ratio of gross tested income produced by the property to the total amount of gross income produced by the property The dual use ratio is calculated as the sum of the amount of the depreciation deduction with respect to the property for the CFC inclusion year that is allocated and apportioned to gross tested income for the CFC inclusion year under Treas. Reg. § 1.951A-2(c)(3) and (d)(3) and the depreciation with respect to the property capitalized to inventory or other property held for sale, the gross income or loss from the sale of which is taken into account in determining tested income for the CFC inclusion year, divided by the sum of the total amount of the depreciation A similar rule applies to partnerships. Treas. Reg. § 1.951A-3(g)(3)(iii) and (4)(ii) IRC §§ 167(a), 168(g), and 951A(d)(2)(B) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1), -2(c)(3) and (d)(3) and -3(d) and (g)(3)(iii) and (4)(ii)

GILTI & QBAI – Short Taxable Years
5 / 8 A short taxable year has less than 12 months The adjusted basis of QBAI at the end of each full quarter is divided by 4 The adjusted basis of QBAI at the end of each short quarter is multiplied by the number of days in each short quarter and divided by 365 The sum of A. + B. equals the QBAI for the short taxable year IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and -3(f)

GILTI-QBAI – Anti-Abuse Rules for Certain Transfers of Ppty.
The benefit of stepped-up basis in specified property, for which a deduction is allowable under IRC §§ 167 or 197, transferred between related CFCs during the period before the transferor CFC’s first inclusion year (before January 1, 2018 for calendar year CFCs) for purposes of calculating the transferee CFC’s GILTI tested income or tested loss is disregarded Basis stepped-up for specified tangible property is disregarded for determining QBAI if (i) the CFC acquires the property with a principal purpose of decreasing a US shareholder's GILTI inclusion, (ii) the specified tangible property is acquired and held temporarily, but over at least the close of 1 quarter and (iii) the transfer results in a decrease to the US shareholder's GILTI inclusion. Safe harbor for specified tangible property for determining QBAI if (i) a rebuttable presumption (by taxpayer) that property held for less than 12 months was acquired with a principle purpose of decreasing GILTI [must attach a statement to Form 5471 to rebut the presumption] or (ii) presumption (which may be rebutted by IRS) that property held for more than 36 months was not acquired with a principle purpose of decreasing GILTI. IRC §§ 167(a), 168(g), 197, and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1), -2(c)(5), and -3(h) 6 / 8 A

The Gap Period Step-Up Rule applies to compute QBAI and generally disregards basis resulting from transfers from January 1, 2018, through the effective date of the GILTI provisions for fiscal-year taxpayers (or calendar-year taxpayers with fiscal-year CFCs). The final GILTI regulations permit the amount of disqualified basis to be reduced or eliminated through (among other things) depreciation or taxable sales or exchanges. For sales to related parties, however, the final regulations now provide that the amount of disqualified basis retains its character as such in the hands of the related purchaser. Further, the disqualified basis can also be replicated or carried over to other property in non-recognition transfers, such as like-kind exchanges under IRC § 1031 or IRC § 351 contributions. Relief to the Gap Period Step-Up Rule is available in the form of an election to eliminate the disqualified basis for all purposes. The election must be made for all related CFCs and partnerships that hold property with disqualified basis. In addition, any return that has already been filed that is inconsistent with the elimination of the disqualified basis must be amended. The election to eliminate the disqualified basis would also provide relief for taxpayers losing FTCs because of IRC § 901(m). IRC §§ 167(a), 168(g), 197, 351, 901(m), 951A(d), and 1031 and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1), - 2(c)(5), and -3(h) 6 / 8 B

An anti-abuse rule treats deductions and losses that relate to disqualified basis resulting from transfers from January 1, 2018 through the effective date of the GILTI provisions as not properly allocable to gross tested income, gross subpart F income or gross income that is ECI. Deductions, including deductions for depreciation or amortization, can only reduce a subpart F income inclusion through operation of the IRC § 952(c) E&P limitation. When the IRC § 952(c) E&P limitation applies, however, a recapture account would be created that would result in additional subpart F income in future years, including by reason of tested income. IRC §§ 167(a), 168(g), 197, 351, 901(m), 951A(d), and 1031 and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1), - 2(c)(5), and -3(h) 6 / 8 C

GILTI & QBAI – QBAI Exceeds 10 Times Tested Income
7 / 8 If a CFC’s QBAI exceeds 10 times its tested income, so that the amount of QBAI allocated to preferred stock would exceed 10 times the tested income allocated to the preferred stock under the general proportionate allocation rule, the excess amount of QBAI is allocated solely to the CFC’s common stock The aggregate amount of any tested item (including QBAI) of a CFC for a CFC inclusion year allocated to the CFC’s stock cannot exceed the amount of such tested item of the CFC for the CFC inclusion year. IRC §§ 167(a), 168(g), and 951A(d) and Treas. Reg. §§ 1.951A-1(c)(3) and (d)(1) and (3)(ii) and (iii)

GILTI & QBAI – Specified Interest Expense
8 / 8 GILTI & QBAI – Specified Interest Expense Specified interest expense (reduces QBAI) = Tested interest expense - Tested interest Income Interest expense of certain lender CFCs and insurance company CFCs as defined under IRC § 954(h) and (i) do not reduce QBAI IRC § 951A(b)(2)(B) reduces net DTIR of a U.S. shareholder by interest expense that reduces tested income (or increases tested loss) for the taxable year of the shareholder to the extent the interest income attributable to such expense is not taken into account in determining such shareholder’s net CFC tested income [netting approach]. Borrowing between commonly-owned CFCs generally does not reduce net DTIR, whereas external borrowing generally does. IRC §§ 951A and 954(h) and (i) and Treas. Reg. §§ 1.951A-1(c)(3)(iii), -2(c)(3) and -4(b)(1)(i) and (iii)(A) and (2)(iii)(A)

Single Definition of Int. Exp. – GILTI & Business Int. Exp.
The Treasury Department and the IRS have determined that taxpayers and the government would benefit from the application of a single definition of interest for both IRC § 951A(b)(2)(B) and IRC § 163(j) (rather than the application of two partially overlapping, but ultimately different standards). Accordingly, the final regulations define “interest expense” and “interest income” by reference to the definition of interest expense and interest income under IRC § 163(j). See Treas. Reg. § 1.951A-4(b)(1)(ii) and (2)(ii). The regulations under IRC § 163(j), when finalized, will address comments on the validity of the definition of interest expense and interest income that are used in those regulations. Because the final regulations adopt this definition for purposes of determining specified interest expense, the discussion in the regulations under IRC § 163(j) will, by extension, address the validity of the definitions as used in these final regulations. IRC § 163(j) and 951A(b)(2)(B) and Treas. Reg. § 1.951A-4(b)(1)(ii) and (2)(ii)

GILTI & Pro Rata Share Rules
Tested income, tested loss, & QBAI determined similarly to subpart F income under pro rata share rules of IRC § 951(a)(2) and Treas. Reg. § (b) and (e) with appropriate modifications to account for the differences between subpart F income and tested income, tested loss, and QBAI GILTI inclusions are based on ownership of CFC (IRC § 958(a)) as of the close of the CFC’s taxable year GILTI determined using average exchange rates for the taxable year of the foreign corporation IRC §§ 951(a)(2), 951A(d), 958(a), and 989(b)(3) and Treas. Reg. §§ 951-1(b) and (e) and 1.951A-1(d)(1) and -6(b)(2)(iii)

GILTI & Basis for Tested Loss CFCs
In the case of a corporate US shareholder (excluding RICs and REITs), for purposes of determining the gain, loss, or income on the direct or indirect disposition of stock of a CFC, the basis of the stock is reduced by the amount of tested loss that has been used to offset tested income in calculating net CFC tested income of the US shareholder The basis reduction is only made at the time of the disposition and therefore does not affect the stock basis prior to a disposition – avoids double deductions A portion of a tax consolidated group member’s offset tested income amount is treated as tax-exempt income and a tax consolidated group member’s used tested loss amount is treated as a noncapital, nondeductible expense Caveat - The final regulations reserve on the rules related to adjustments to stock of tested loss CFCs. See Treas. Reg. §§ 1.951A-6(c), (b)(3)(ii)(E) and (iii)(C), and (c) and (d). Any rules issued under these regulations will apply only with respect to tested losses incurred in taxable years of CFCs and their U.S. shareholders ending after the date of publication of any future guidance. IRC §§ 245A and 1059 and Prop. Treas. Reg. §§ 1.951A-6(e), (b)(3)(ii)(E) and (F) and (iii)(C), and (c) and (d) & Treas. Reg. §§ 1.951A-6(c), (b)(3)(ii)(E) and (iii)(C), and (c) and (d).

GILTI and Foreign Tax Credits (“FTCs”)
Regulations relating to FTCs provide rules for assigning the IRC § 78 gross-up attributable to foreign taxes deemed paid under IRC § 960(d) to the separate category described in IRC § 904(d)(1)(A) (e.g. GILTI basket) For GILTI IRC § 78 gross-up attributable to foreign taxes is at 100%, but FTC is limited to 80% of IRC § 78 gross-up attributable to foreign taxes under IRC § 960(d) IRC §§ 78, 250, 904(d)(1)(A), 951A, and 960(d) and Treas. Reg. §§ and

GILTI and Reporting Requirements
Subpart F income inclusion and reporting requirements formerly required ownership of a CFC for an uninterrupted period of at least 30 days IRC § 951(a)(1) was amended to remove such 30 day requirement for subpart F income and GILTI For a CFC at any time during taxable year, US shareholder, who owns stock of CFC on last day of CFC’s taxable year, must include pro rata shares of subpart F income, GILTI, and QBAI of CFC IRC §§ 951(a)(1), 951A(e) and 6038(a)(1) and Treas. Reg. § (a)

GILTI – Deemed Payments under IRC § 367(d)
In general, IRC § 367(d) provides that if a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC §§ 351 or 361, the person is treated as having sold the property in exchange for payments contingent upon the productivity, use, or disposition of such property. The regulations under IRC § 367(d) provide that the deemed payment may be treated as an expense (whether or not that amount is actually paid) of the transferee foreign corporation that is properly allocated and apportioned to gross income subject to subpart F under the provisions of Treas. Reg. §§ (c) and See Temp. Treas. Reg. §1.367(d)-1T(c)(2)(ii) and (e)(2)(ii). In response to comments, the final regulations clarify that a deemed payment under IRC § 367(d) is treated as an allowable deduction for purposes of determining tested income and tested loss. See Treas. Reg. § 1.951A-2(c)(2)(ii). Accordingly, consistent with the regulations under IRC § 367(d), such deemed payments may be allocated and apportioned to gross tested income to the extent provided under Treas. Reg. § 1.951A-2(c)(3). IRC §§ 351, 361, 367(d), 861, 951(a)(1), and 951A and Temp. Treas. Reg. § 1.367(d)-1T(c)(2)(ii) and (e)(2)(ii) and Treas. Reg. §§ 1.951A-2(c)(2)(ii) and (3) and (c)

GILTI thru Domestic & Foreign Partnerships
When a US person is a partner of a domestic partnership that owns, under IRC § 958(a), stock in a CFC, the final GILTI regulations treat the domestic partnership as foreign, thus requiring the US partner to account directly for the GILTI items of that CFC in determining its GILTI inclusion. The domestic partnership can still constitute a US shareholder of the CFC and the foreign corporation can still constitute a CFC because of the domestic partnership. As a result, the domestic partnership will not have a GILTI inclusion with respect to that CFC; instead, the GILTI inclusion would be directly to the US partners for which the inclusion is required. The proposed regulations extend this treatment to subpart F income, but not until regs are final, unless elected consistently for all US S/H partners and their FCs. Domestic partnerships that dispose of CFC stock at a gain are still subject to the re-characterization rules of IRC § 1248, which generally treat the gain as a dividend to the extent of untaxed earnings and profits. Aggregate approach – Not entity approach. Regulations are final for foreign partnerships aggregate approach and proposed for domestic partnerships and S corporations aggregate approach (need an election). See Notice and Rev. Proc , particularly for penalty relief. IRC §§ 951(a)(1), 951A(e), 958(a), 1248, 1373(a),and 6038(a)(1) and Prop. Treas. Reg A-1(e) and- 5(c) and Treas. Reg. §§ (h), 1.951A-1(e)(1), 1.951A-5, (e), (a) and Notice and Rev. Proc

Notice 2019-46 - GILTI thru Domestic Partnerships
1 / 2 Notice SECTION 1. OVERVIEW This notice announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to issue regulations that will permit a domestic partnership or S corporation to apply the rules in proposed §1.951A-5 for taxable years ending before June 22, This notice also addresses the applicability of penalties in the case of a domestic partnership or S corporation that acted consistently with proposed §1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under §1.951A-1(e). In order to apply the rules in proposed §1.951A-5 or for penalties not to apply as discussed in this notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements described in section 5 of this notice. The regulations described in this notice will be effective for taxable years ending before June 22, Prior to the issuance of the regulations described in this notice, domestic partnerships and S corporations may rely on this notice, provided they satisfy the requirements described herein.

Notice 2019-46 - GILTI thru Domestic Partnerships
2 / 2 Notice (Continued) SECTION 5. REQUIREMENTS FOR APPLICATION OF PROPOSED §1.951A-5 AND INAPPLICABILITY OF PENALTIES .01 Notification In order for the rules described in section 3 or section 4 of this notice to apply, a domestic partnership or S corporation must provide notification to each partner of the partnership or shareholder of the S corporation (1) that the Schedule K-1 provided to the partner or shareholder is consistent with proposed §1.951A-5; (2) whether the domestic partnership or S corporation filed a Form 1065 or Form 1120S consistent with proposed §1.951A-5 or the Final Regulations; and (3) that the notification is being provided in accordance with this notice. Such notification must be provided no later than the extended due date of the domestic partnership’s or S corporation’s tax return (September 16, 2019, in the case of a calendar-year filer), and may be provided through any reasonable method, including via mail, , or posting on a website through which the domestic partnership or S corporation would ordinarily disseminate tax information to its partners or shareholders. In the event a domestic partnership or S corporation has filed its tax return and not filed for an extension of time to file its return, the notice described in this section 5.01 must be provided by the date on which the return would have been due had an extension been properly requested. The domestic partnership or S corporation must also attach the notification described in the previous paragraph and Form 8992 reflecting computations under proposed §1.951A-5 to any tax return with respect to which the rules described in section 3 or 4 of this notice are being applied if the tax return has not been filed as of the date of publication of this notice.

Ordering of E&P upon Distribution & Reclassification
1 / 7 Notice was issued to address the rules for repatriations, generally arising from IRC § 959(c)(1), (2) and (3) in that order based on a LIFO approach, but IRC § 965(a) & (b) E&P is always deemed distributed first regardless of vintage year. Compliance complexity has expanded significantly, demanding more time from tax professionals that will require added resources, technology demands and external advisor costs. Introduction of 16 annual Previously Taxed E&P (“PTEP”) accounts for each IRC § 904 category of income. Non-PTEP is pooled in post-1986 accounts (not pooled annually) Subpart F income is usually limited by E&P. GILTI is determined by Tested Income reduced by Allowable Deductions under US tax rules, reduced by QBAI and specified interest expense – not limited by E&P. Notice will be replaced with regulations applying to US shareholders with taxable years ending after Dec. 14, 2018 IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

2 / 7 [16] .04 Examples The rules described in sections 3.02 and 3.03 of this notice are illustrated in the following examples: Example 1--(i) Facts. USP, a domestic corporation, wholly owns FC, a foreign corporation that has the U.S. dollar as its functional currency. Both USP and FC use the calendar year as their taxable year. Before 2018, the PTEP of FC was maintained in annual accounts. As of December 31, 2018, FC’s $300x [25x + 255x + 20x] of E&P (before taking into account distributions made or inclusions under section 951(a)(1)(B) in 2018) applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows: Section 959(c)(1) Section 959(c)(2) Year Reclassified Section 965(a) PTEP Reclassified Section 965(b) PTEP Section 951(a)(1)(B) PTEP Section 965(a) PTEP Section 965(b) PTEP Section 951A PTEP Section 951(a)(1)(A) PTEP Section 959(c)(3) [Pooling] 2018 50x 30x ) 2017 100x 000000 ) 20x 2016 25x 00000 Total 255x 20x In 2018, FC has an amount described in section 956(a) (“section 956(a) amount”) of $125x [100x + 25x], without considering the application of section 959(a)(2). In 2019, FC earns $25x of current E&P, and the amount of USP’s income inclusion under section 951A(a) that is allocated to FC under section 951A(f)(2) and proposed §1.951A-6(b)(2) is $20x. FC also makes a distribution of $195x in In 2020, FC earns no current E&P, but FC makes a distribution of $60x. For all years, the PTEP of FC in each PTEP group is described in a single section 904 category, and all section 959(c)(3) E&P of FC are described in a single section 904 category. IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

Reclassified Section 965(a) PTEP Reclassified Section 965(b) PTEP
Ordering of E&P upon Distribution & Reclassification 3 / 7 (ii) Analysis--(A) As of December 31, 2018, before considering FC’s section 956(a) amount, FC has total section 959(c)(2) PTEP of $255x. Under section 959(a)(2) and (f)(1), because FC’s section 959(c)(2) PTEP exceeds its section 956(a) amount, USP does not include any amount in income under section 951(a)(1)(B). However, under section 959(c)(1)(A), $125x [100x + 25x] of FC’s section 959(c)(2) earnings must be reclassified as section 959(c)(1) PTEP. Under the rules described in section 3.02 of this notice, the reclassification is sourced first from section 965(a) PTEP [100x] and then from section 965(b) PTEP [25x]. Under the rules in section 3.01 of this notice, the reclassified PTEP remains in the 2017 annual PTEP account. Thus, in FC’s 2017 annual PTEP account, FC’s reclassified section 965(a) PTEP is increased by $100x and its section 965(a) PTEP is decreased by $100x. Additionally, FC’s reclassified section 965(b) PTEP is increased by $25x and its section 965(b) PTEP is decreased by $25x. Accordingly, as of December 31, 2018, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows: Section 959(c)(1) Section 959(c)(2) Year Reclassified Section 965(a) PTEP Reclassified Section 965(b) PTEP Section 951(a)(1)(B) PTEP Section 965(a) PTEP Section 965(b) PTEP Section 951A PTEP Section 951(a)(1)(A) PTEP Section 959(c)(3) [Pooling] 2018 50x 30x ) 2017 100x 25x 000000 ) 20x 2016 00000 Total 150x 130x 20x IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

4 / 7 B) (1) Current year adjustments. During 2019, FC earns $25x of current E&P, and the amount of USP’s income inclusion under section 951A(a) that is allocated to FC under section 951A(f)(2) and proposed §1.951A-6(b)(2) is $20x. Thus, before taking into account USP’s income inclusions with respect to FC and any distributions by FC, FC’s section 959(c)(3) E&P is initially increased by $25x [20x + 5x]. As a result of USP’s income inclusion under section 951A, FC’s section 951A PTEP increases by $20x and FC’s section 959(c)(3) E&P is decreased by $20x. Accordingly, as of December 31, 2019, FC’s E&P (before taking into account distributions made in 2019) applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows: Section 959(c)(2) Year Reclassified Section 965(a) PTEP 965(b) Section 951(a)(1)(B) PTEP Section 965(a) PTEP Section 965(b) PTEP Section 951A Section 951(a)(1)(A) PTEP Section 959(c)(3) [Pooling] 2019 20x ) 2018 50x 30x 2017 100x 25x 000000 ) x 2016 00000 Total 150x IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

5 / 7 (2) Distribution. FC’s distribution of $195x [150x + 45x] is from PTEP because the entire distribution would be a dividend under section 316(a) without regard to section 959 (that is, for purposes of section 316, at the end of 2019, FC has $325x [150x + 150x + 25x] of E&P (without regard to the distribution), $25x of which is current E&P). Under section 959(c), the distribution is first treated as attributable to section 959(c)(1) PTEP. (i) Section 959(c)(1) PTEP. Under the rules described in section 3.02 of this notice, the distribution is first sourced from reclassified section 965(a) PTEP [100x] and then from reclassified section 965(b) PTEP [25x], and then pro rata from the remaining PTEP groups that contain section 959(c)(1) PTEP under a last-in, first-out (“LIFO”) approach. Thus, in FC’s 2017 annual PTEP account, FC’s reclassified section 965(a) PTEP is decreased by $100x and its reclassified section 965(b) PTEP is decreased by $25x. In FC’s 2016 annual PTEP account, FC’s section 951(a)(1)(B) PTEP is reduced by $25x. Thus, of the distribution of $195x, $150x is treated as attributable to section 959(c)(1) PTEP ($100x + $25x + $25x). IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

6 / 7 (ii) Section 959(c)(2) PTEP. After the section 959(c)(1) PTEP is exhausted, the remaining portion of the distribution ($45x) is treated as attributable to section 959(c)(2) PTEP, to the extent thereof. Under the rules described in section 3.02 of this notice, distributions are first sourced from section 965(a) PTEP and then from section 965(b) [18] PTEP, and then pro rata from the remaining PTEP groups that contain section 959(c) (2) PTEP [100x] under a LIFO approach. Thus, in FC’s 2017 annual PTEP account, FC’s section 965(b) PTEP is decreased by $25x. In FC’s 2019 annual PTEP account, FC’s section 951A PTEP is decreased by $20x. Because the entire distribution has been accounted for, the remaining PTEP groups that contain section 959(c)(2) PTEP and FC’s section 959(c)(3) E&P are not affected. Accordingly, as of December 31, 2019, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows: Section 959(c)(1) Section 959(c)(2) Year Reclassified Section 965(a) PTEP Reclassified Section 965(b) PTEP Section 951(a)(1)(B) PTEP Section 965(a) PTEP Section 965(b) PTEP Section 951A PTEP Section 951(a)(1)(A) PTEP Section 959(c)(3) [Pooling] 2019 ) 2018 50x 30x 2017 000000 ) x 2016 00000 25x Total 105x IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

7 / 7 (C) FC’s distribution of $60x [37.5x x] is from PTEP because the entire distribution would be a dividend under section 316(a) without regard to section 959 (that is, for purposes of section 316, at the end of 2020, FC has $130x [105x + 25x] of E&P (without regard to the distribution), all which is accumulated E&P). Under section 959(c), the distribution is first treated as attributable to section 959(c)(1) PTEP; however, FC has no section 959(c)(1) PTEP. Additionally, FC has no section 965(a) PTEP or section 965(b) PTEP. Under the rules described in section 3.02 of this notice, the distribution is sourced pro rata from the remaining PTEP groups that contain section 959(c)(2) PTEP under a LIFO approach. Thus, in FC’s 2018 annual PTEP account, FC’s section 951A PTEP is decreased by $37.5x ($60x x $50x/$80x) and its section 951(a)(1)(A) PTEP is decreased by $22.5x ($60x x $30x/$80x). Because the entire distribution has been accounted for, the remaining PTEP groups that contain section 959(c)(2) PTEP and FC’s section 959(c)(3) E&P are not affected. Accordingly, as of December 31, 2020, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows: Section 959(c)(1) Section 959(c)(2) Year Reclassified Section 965(a) PTEP Reclassified Section 965(b) PTEP Section 951(a)(1)(B) PTEP Section 965(a) PTEP Section 965(b) PTEP Section 951A PTEP Section 951(a)(1)(A) PTEP Section 959(c)(3) [Pooling] 2019 ) 2018 12.5x 7.5x 2017 000000 ) 25x 2016 00000 25x Total 45x IRC §§ 245A(d) & (e), 301(c), 316, 904, 951(a), 951A(a) & (f), 952(c)(1)(A), 956, 957, 959(a), (b), (c), & (e), 960, 961, 964(e), 965(a), (b), & (o), 986(c), 1248(a) & (j), and 7805(a) and Prop. Treas. Reg. §§ (a), 1.951A-6(b) & (d), (b) & (e), & -3(c), , 1.986(c)-1, & Notice , I.R.B (Jan. 7, 2019)

GILTI Consolidated Computations
Calculation of net CFC tested income within a consolidated group when all CFCs are wholly owned by a member Prop. Treas. Reg. § (f)Ex.1 P owns all of USS1, USS2, USS3 - all members of P consolidated group USS1 owns all of CFC1 USS2 wons all of CFC2 and CFC3 USS3 owns all of CFC4 CFC1 = tested loss of ($100) CFC2 = tested income of $200 CFC3 = tested loss of ($200) CFC4 = tested income of $600 Allocable Shares Consolidated Net Group GILTI CFC Tested Allocation Entity Income Ratio Loss USS1 / CFC1 0% ($100) $0 USS2 / CFC2 $200 25% ($75) $125 ) USS2 / CFC3 ($200) USS3 / CFC4 $600 75% ($225) $375 Totals $800 100% ($300) $500 Assume that no entity has QBAI Proof Final Treasury Regulations adopt Proposed Treasury Regulations without substantial changes Continued on next slide

GILTI Consolidated Computations
Calculation of net CFC tested income within a consolidated group P owns all of USS1, USS2, USS3 - all members of P consolidated group when all CFCs are wholly owned by a member USS1 owns all of CFC1 Prop. Treas. Reg. § (f)Ex.3 USS2 wons all of CFC2 and CFC3 USS3 owns all of CFC4 CFC1 = tested loss of ($100) *, QBAI of $0, tested interest expense of $25, tested interest income of $0 CFC2 = tested income of $200, QBAI of $500, tested interest expense of $0, tested interest income of $0 CFC3 = tested loss of ($200), QBAI of $0, tested interest expense of $0, tested interest income of $0 CFC4 = tested income of $600 *, QBAI of $2000, tested interest expense of $25, tested interest income of $0 * - Net of $25 interest expense Allocable Shares 10% Net Consolidated Qualified Deemed Used Offset Group GILTI CFC Business Tangible Tested Specified Allocation Asset Income Interest Inclusion Loss Entity Ratio Investment Return Expense Amount USS1 / CFC1 0% ($100) $0 $0.00 $25 USS2 / CFC2 $200 25% ($75) $125 $500 $625 $62.50 $12.50 $50 $75 USS2 / CFC3 ($200) USS3 / CFC4 $600 75% ($225) $375 $2,000 $1,875 $187.50 $37.50 $150 $225 Totals $800 100% ($300) $2,500 $250.00 $50.00 $300 ** Proof ** - Requires basis adjustment (decrease)in year of disposition pursuant to Prop. Treas. Reg. Sec (b)(3)(iii)(C) Final Treasury Regulations adopt Proposed Treasury Regulations without substantial changes

GILTI Forms Schedule I-1 (Form 5471), Information for Global Intangible Low-Taxed Income Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI) (Released Aug. 22, 2018) [4 pages] [Separate company, not consolidated] Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) (Released Aug. 22, 2018) [1 page] The above named forms will be attachments to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations Existing Forms 1065 –Schedule K, 1120S - Schedule K, and 5471 (30 days) will be revised IRC §§ 250, 951(a)(1), and 951A and Prop. Treas. Reg. §§ (a) (CFCs), (g) (definition of U.S. shareholder), and (h) (partnership blocker structure) and and -5

GILTI Form Form 8990, Limitation on Business Interest Expense Under Section 163(j) (Released Oct. 25, 2018) [3 pages] Draft IRS Instructions to Form 8990 (Dec. 2018) (Released Dec. 10, 2018) IRC § 163(j)

GILTI – Final Treasury Regulations
§ Gross up for deemed paid foreign tax credit. [also issued under 26 U.S.C. 245A(g).] § (c)(2) Characterization rules and adjustments for certain assets Basis adjustment for stock in 10 percent owned corporations [also issued under 26 U.S.C. 864(e)(7) and 7805.] § T(c)(2)(i)(A) through (C) [Reserved] Characterization rules and adjustments for certain assets (temporary). § Amounts included in gross income of United States shareholders. [also issued under 26 U.S.C. 7701(a) and 7805.] §1.951A-0 Outline of section 951A regulations. §1.951A-1 General provisions. §1.951A-2 Tested income and tested loss. [also issued under 26 U.S.C. 882(c)(1)(A) and 954(b)(5) and 7805.] §1.951A-3 Qualified business asset investment. [also issued under 26 U.S.C. 951A(d)(4).] §1.951A-4 Tested interest expense and tested interest income. §1.951A-5 Treatment of GILTI inclusion amounts. [also issued under 26 U.S.C. 951A(f)(1)(B).] §1.951A-6 Adjustments related to tested losses. §1.951A-7 Applicability dates. 1 / 2 318 pages with Preamble when released – June 14, 2019 83 pages as sent to the Federal Register – June 21, 2019 T.D. 9866, [ p], RIN 1545-BO54 and 1545-BO62, REG , 84 FR 29288

GILTI – Final Treasury Regulations
2 / 2 § (e) Elections, payment, and other special rules. [regarding Net Operating Loss elections, limitations, and computations, might effect transition tax as well as regular income tax] § (s) Separate Taxable Income See § for rules relating to the computation of a member’s GILTI inclusion amount under section 951A and related basis adjustments. § (b)(3)(ii)(E) [Reserved] and (iii)(C) [Reserved] Investment adjustments. § Consolidated section 951A. [also issued under 26 U.S.C ] § (a) Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations Requirement of return. § Information returns required of certain United States persons to report amounts determined with respect to certain foreign corporations for global intangible low-taxed income (GILTI) purposes. [also issued under 26 U.S.C and 7805.]

GILTI – Proposed Treasury Regulations
§ Amounts included in gross income of United States shareholders §1.951A-0 Outline of section 951A regulations §1.951A-1 General provisions §1.951A-2 Tested income and tested loss §1.951A-3 Qualified business asset investment §1.951A-4 Tested interest expense and tested interest income §1.951A-5 Domestic partnerships and their partners §1.951A-6 Treatment of GILTI inclusion amount and adjustments to earnings and profits and basis related to tested loss CFCs §1.951A-7 Applicability dates § Separate Taxable Income § Intercompany transactions § Investment adjustments § Consolidated section 951A § Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations § Information returns required of certain United States persons to report amounts determined with respect to certain foreign corporations for global intangible low-taxed income (GILTI) purposes 157 pages with Preamble when released – Sep. 13, 2018 39 pages as sent to the Federal Register – Oct. 10, 2018 [ p], RIN 1545-BO54 and 1545-BO62, REG

100% DRD & CFC Investments in US Property
100% Dividends Received Deduction (“DRD”) GILTI – Individuals Taxed as Corporations GILTI HTE – Proposed Treasury Regulations CFC Investments in US Property and 100% DRD Special Rules for Hybrid Dividends DRD – Extraordinary Dispositions or Reductions DRD – Ordering Rules for Dividend Distributions DRD & Look Thru Limitations – Prop. & Temp. Treas. Regs.

100% Dividends Received Deduction (“DRD”)
1 / 2 100% Dividends Received Deduction (“DRD”) 100% DRD (participation exemption system) on foreign income is allowed to a ≥ 10% US shareholder of a foreign corporation held ≥ 365 days of 731 days before the dividend is paid DRD available only to domestic C corporations or to individuals electing to be taxed as C corporations, NOT to REITs, RICs, or individuals Passive Foreign Investment Company (“PFIC”) dividends are NOT eligible for DRD DRD NOT available for Effectively Connected Income (“ECI”) from conduct of a trade or business within the US or ≥ 80% owned domestic corporation IRC §§ 245A and 951(b)

100% Dividends Received Deduction (“DRD”)
2 / 2 100% Dividends Received Deduction (“DRD”) IRC § 1248 deemed dividends on sale of foreign shares are eligible for 100% DRD Losses in shares of foreign corporations from which a US shareholder has received a DRD are reduced by as much as the DRD amount, but does NOT cause taxable income DRD NOT available for hybrid dividend received by a CFC, which received a deduction or other tax benefit from a foreign country Foreign source portion of a dividend (eligible for DRD) equals the same proportion of the dividend as the foreign corporation’s undistributed foreign earnings bears to its total undistributed earnings IRC §§ 245A, 951(b), 961(d), 964(e), and 1248 and Temp. Treas. Reg. § 1.245A-5T

GILTI – Individuals – Taxed as Corporations
Individuals taxed as corporations regarding income and related FTCs 50% of GILTI deduction under IRC § 250 No dividends received deduction under IRC § 245A Election is based on IRC § 962 enacted by Revenue Act of 1962 with some minor amendments See IRC § 1248(b)(1) and (d)(1) for FTC & E&P for sales by an individual of a CFC IRC §§ 11, 245A, 250, 961, 962, 965, and 1411 & Prop. Treas. Reg. §§ (a)(2) and (3) and (g)(4) and (5), (b) & -2(a) and (e)

GILTI HTE – Proposed Treasury Regulations
§ (a)(4) Amounts included in gross income of United States shareholders. §1.951A-0 Outline of section 951A regulations. §1.951A-2(c)(1)(iii) and (6) Tested income and tested loss (6) Election for application of high tax exception of section 954(b)(4) §1.951A-7(a), (b), and (c) Applicability dates. (a) In general. (b) High tax exclusion. (c) Domestic partnerships. § (c)(1)(iii)(A)(3) and (d)(1) and (3)(i) and (h)(1) Foreign base company I ncome (A)(3) Amount of a single item. § (g)(4) Shareholder’s pro rata share of the average of the amounts of United States property held by a controlled foreign corporation. § (d) Direct and indirect ownership of stock (d) Stock owned through domestic partnerships § (b) and (g)(2) Consolidated section 951A. 74 pages with Preamble when released – June 14, 2019 20 pages as sent to the Federal Register – June 21, 2019 REG , RIN 1545-BP15, 84 FR 29114

CFC Investments in US Property and 100% DRD
CFC investments in US property (including certain pledges and guarantees) at quarter-end (for > 30 days) X ¼ are taxed currently in the US as subpart F income under IRC § 956 and provide basis in CFC shares under IRC § 961 Beginning generally in 2018, US shareholder’s pro rata share of IRC § 956 investments in US property at quarter end (for > 30 days) X ¼ are deemed dividends (tentative IRC § 956 amount), but only to the extent that they exceed the CFC’s foreign source income entitled to a 100% DRD on a hypothetical distribution under IRC § 245A (participation exemption system) Apply IRC § 959(c)(2) E&P first & then IRC § 959(c)(3) E&P & do not apply tentative IRC § 959(c)(1) E&P (matched with IRC § 956 inclusions) in hypothetical distribution ordering rule. IRC § 956 might no longer apply to corporate US shareholders in many circumstances. IRC §§ 245A, 246, 951(b), 956, 959, 961, 964(e), and 1248, Notice , , , , and , and Prop. Treas. Reg. § (a)(2) and (3) and (g)(4) and (5) (REG , 83 FR 55324, ) and Treas. Reg. § (a)(2) and (3), and (g)(4) and (5) (T.D. 9859, , 84 FR 23716)

Special Rules for Hybrid Dividends
A Dividend Received Deduction (“DRD”) is allowed with respect to the foreign-source portion of a dividend from a specified 10% owned foreign corporation by a domestic corporation which is a US shareholder with respect to the foreign corporation. A DRD is NOT available to a US shareholder of a CFC for a dividend that is a hybrid dividend. A hybrid dividend is a dividend for which the above referenced DRD would be available and the CFC received a deduction (or other tax benefit) under the income tax laws of a foreign country or possession. If a tiered CFC receives a hybrid dividend from a CFC, it is subpart F income that is taxed to the US S/H. FTC is denied for any hybrid dividend. Applies mostly to inbound investors eroding the US tax base. IRC § 245A(a) & (e) and Prop. Treas. Reg. § 1.245A(e)-1.

DRD – Extraordinary Dispositions or Reductions
1 / 2 Temp. Treas. Reg. § 1.245A-5T scales back the DRD for two categories of transactions. One category involves “extraordinary dispositions,” or gap period transactions (i.e., the period between December 31, 2017 and the effective date of §951A as applied to a fiscal year CFC); where applicable, the DRD is reduced to 50% of the amount otherwise deductible (like 50% GILTI deduction under IRC § 250). An extraordinary disposition is a disposition of property by a Specified Foreign Corporation (“SFC”): To a related party That occurs during the SFC's GILTI gap period That is outside of the SFC's ordinary course of business * That would have resulted in tested income if gain were recognized outside of the disqualified period * - Dispositions undertaken with a principal purpose of generating E&P during the gap period or dispositions of intangible property, as defined in IRC § 367(d)(4), are per se outside of the ordinary course of the SFC's business. A de minimis rule (of $50 million or 5% of the gross value of the SFC's property) applies. IRC §§ 245A(a) & 954(c)(6) and Temp. Treas. Reg. §§ 1.245A-5T and 1.954(c)(6)-1T.

DRD – Extraordinary Dispositions or Reductions
2 / 2 Temp. Treas. Reg. § 1.245A-5T scales back the DRD for two categories of transactions. The other category is more far-reaching: up to 100% of the DRD is eliminated for “extraordinary reductions,” whereby a §245A shareholder of a CFC transfers stock of the CFC or otherwise has its ownership diluted (and assuming an election (attached to an original or amended return) is not made to close the CFC’s taxable year). According to Treasury, when viewed together with GILTI and Subpart F, “this integrated set of statutory rules can be reasonably understood to require that the [DRD] not apply to E&P attributable to income of a type that is properly subject to the subpart F or GILTI regimes.” IRC § 954(c)(6) exception to FPHCI also partially or totally denied for distributions from a lower tier CFC to an upper tier CFC. An extraordinary reduction is a transaction in which either (1) a "controlling IRC § 245A shareholder" transfers more than 10% (by value) of its CFC stock (at least 5% of total CFC stock) or (2) there is a greater than 10% change (by value) in the controlling IRC § 245A shareholder's overall ownership of the CFC (and at least 5 percentage points). A de minimis rule applies if the CFC's subpart F income and tested income for the year do not exceed the lesser of $50 million or 5% of the CFC's total income. IRC §§ 245A(a) & 954(c)(6) and Temp. Treas. Reg. §§ 1.245A-5T and 1.954(c)(6)-1T.

DRD – Ordering Rules for Dividend Distributions
The DRD ordering rules for dividend distributions on or after Jan. 1, 2018 follow: IRC § 245A(e) Hybrid Dividend rules apply first, then the Extraordinary Reduction Amount rules, and finally the Extraordinary Disposition Amount rules. This information must be reported on revised tax forms. The temporary regulations do not, however, modify the ordering rules under IRC § 959(c) (i.e., previously taxed E&P is accessed first on a last-in-first-out basis) IRC §§ 245A and 6038 and Temp. Treas. Reg. §§ 1.245A-5T and Prop. Treas. Reg. § (f) and (m).

DRD & Look Thru Limitations – Prop. & Temp. Treas. Regs.
§ 1.245A-1 [Reserved]. § 1.245A-2 [Reserved]. § 1.245A-3 [Reserved]. § 1.245A-4 [Reserved]. § 1.245A-5 Limitation of section 245A deduction and section 954(c)(6) exception. [also issued under 26 U.S.C. 245A(g), 951A(a), 954(c)(6), 965(o), and and 7805] § 1.954(c)(6)-1 Certain cases in which section 954(c)(6) exception not available. [also issued under 26 U.S.C. 954(c) and 7805.] § (f)(13) thru (15) [Reserved], (16) and (m) Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after December 31, 1962. 8 pages with Preamble when released – June 14, 2019 2 pages as sent to the Federal Register – June 18, 2019 [ p], REG , RIN 1545-BP35, 84 FR 28426

Repeal of IRC § 958(b)(4) – Prop. Treas. Regs.
1 / 3 The Treasury Department on October 1, 2019 released Proposed Treasury Regulations that would limit the impact of the repeal of IRC § 958(b)(4) in determining the CFC status of a foreign corporation when applying certain provisions of the IRC. Before its repeal by the Tax Cuts and Jobs Act (“TCJA”), IRC § 958(b)(4) prevented a US subsidiary from being treated as owning stock in a foreign-owned brother-sister subsidiary for purposes of determining whether the brother-sister foreign subsidiary was a CFC. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017)

2 / 3 The Proposed Treasury Regulations do not provide broad relief from the repeal of IRC § 958(b)(4), but instead offer targeted relief by effectively causing select IRC provisions to apply as if IRC § 958(b)(4) had not been repealed. They notably: Modify IRC § 267(a)(3) to allow a taxpayer to deduct accrued but unpaid amounts (other than interest) owed to a CFC when (i) the payment is not subject to withholding tax under a treaty, and (ii) the CFC does not have any US shareholders (as defined in IRC § 951(b)) that own (within the meaning of IRC § 958(a)) stock of the CFC Determine CFC status without regard to the repeal of IRC § 958(b)(4) for purposes of the IRC § 1297(e) PFIC asset test Determine CFC status without regard to the repeal of IRC § 958(b)(4) for purposes of the CFC FTC look-through rules under IRC § 904(d)(3) Provide additional rules, including narrowing the gain recognition agreement triggering event exception in Treas. Reg. § 1.367(a)-8(k)(14) and determining CFC status for purposes of applying IRC § 332(d)(3) to the liquidation of an applicable holding co. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017)

3 / 3 The Proposed Treasury Regulations generally would apply on or after October 1, For tax years before tax years covered by the Proposed Treasury Regulations, taxpayers generally may apply the rules in the Final Treasury Regulations to the last tax year of a foreign corporation beginning before 1 January 2018, if certain conditions are met. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017) FP 10% 10% 9% USS FS USS is deemed to own 10% of FS as follows: USS indirect ownership of FS thru FP 10% X 10% = 1% thru attribution USS direct ownership of FS = 9% USS indirect and direct ownership of FS 1% (indirect) + 9% (direct) = 10% USS inclusions required because own ≥ 10% of FS thru attribution and directly USS must include subpart F income and / or GILTI from FS of 9% annually attributable to only direct ownership of FS

Repeal of IRC § 958(b)(4) – Rev. Proc. 2019-40
1 / 2 Repeal of IRC § 958(b)(4) by the TCJA caused many foreign corporations to become CFCs even though US shareholders do not directly or indirectly control the foreign corporation. It also created reporting challenges for minority US shareholders in obtaining information needed to accurately determine whether a foreign corporation is a CFC and compute the subpart F income inclusion or GILTI inclusion with respect to the CFC. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017)

Repeal of IRC § 958(b)(4) – Rev. Proc. 2019-40
2 / 2 “As in effect before repeal, section 958(b)(4) provided that subparagraphs (A), (B), and (C) of section 318(a)(3) (providing for downward attribution) were not to be [3] applied so as to consider a U.S. person as owning stock owned by a person who is not a U.S. person (“foreign person”). Effective for the last taxable year of foreign corporations beginning before January 1, 2018, and each subsequent year of the foreign corporations, and for the taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end, section 958(b)(4) was repealed by section of the Tax Cuts and Jobs Act, Pub. L (2017).” IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017) and Rev. Proc (Oct. 1, 2019), Sec. 2. BACKGROUND, pp. 2 and 3

Rev. Proc Summary 1 / 2 Creates a safe harbor for concluding that a foreign corporation is not a CFC when (i) the foreign corporation would only be a CFC due to the repeal of IRC § 958(b)(4) (a foreign-controlled CFC), and (ii) CFC status is not known through actual knowledge, statements received, and/or reliable publicly available information Allows, in the absence of readily available information generally required under IRC §§ 952 [subpart F income defined] and 964 [misc.], a US shareholder's subpart F income inclusion or GILTI inclusion amount with respect to certain foreign-controlled CFCs to be based upon a hierarchy of alternative information, such as Generally Accepted Accounting Principles (“GAAP”) or International Financial Reporting Standards (“IFRS”) financial statements (alternative information) IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017) IRC §§ 245A and 6038 and Temp. Treas. Reg. §§ 1.245A-5T and Prop. Treas. Reg. § (f) and (m).

Rev. Proc Summary 2 / 2 Allows a US shareholder to rely on alternative information in the absence of readily available information for determining the IRC § 965 [treatment of deferred foreign income upon transition to participation exemption system of taxation] inclusion amount with respect to certain specified foreign corporations Limits a foreign-controlled CFC's reporting on Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations Offers relief from penalties under IRC §§ 6038 [information reporting with respect to certain foreign corporations and partnerships] [imposition of accuracy-related penalty on underpayments] to the extent the penalties would be attributable to a US person relying on Rev. Proc 's safe harbors IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017)

Rev. Proc. 2019-40 – Alternative Information
1 / 2 (i) Audited separate-entity financial statements of the foreign corporation that are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). (ii) Audited separate-entity financial statements of the foreign corporation that are prepared on the basis of international financial reporting standards (“IFRS”). (iii) Audited separate-entity financial statements of the foreign corporation that are prepared on the basis of the generally accepted accounting principles of the jurisdiction in which the foreign corporation is organized (“local-country GAAP”). (iv) Unaudited separate-entity financial statements of the foreign corporation that are prepared in accordance with U.S. GAAP. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017) and see Rev. Proc (Oct. 1, 2019), Sec. 3. DEFINITIONS, 01. Alternative information, (a) in general, pp

Rev. Proc. 2019-40 – Alternative Information
2 / 2 (v) Unaudited separate-entity financial statements of the foreign corporation that are prepared on the basis of IFRS. (vi) Unaudited separate-entity financial statements of the foreign corporation that are prepared on the basis of local-country GAAP. (vii) Separate-entity records used by the foreign corporation for tax reporting. (viii) Separate-entity records used by the foreign corporation for internal management controls or regulatory or other similar purposes. IRC § 958(b)(4) was repealed by § of the TCJA, Pub. L (2017) and see Rev. Proc (Oct. 1, 2019), Sec. 3. DEFINITIONS, 01. Alternative information, (a) in general, pp

Repeal of IRC § 958(b)(4) – Proposed Treasury Regulations
§ 1.267(a)-3(c)(4) Deduction of amounts owed to related foreign persons Certain amounts owed to certain controlled foreign corporations § Recognition of gain on liquidation of certain holding companies § 1.367(a)-8(k)(14)(ii) Gain recognition agreement requirements § 1.672(f)-2(a) Certain foreign corporations § (b)(6)(ii) Taxable years of partner and partnership Definition of foreign partner § (b)(2)(ii) Source of income derived from space and ocean activity under section 863(d) Space and ocean income derived by a controlled foreign corporation (CFC) § (b)(2)(ii) Source of income derived from communications activity under section 863(a), (d), and (e) International communications income derived by a controlled foreign corporation 1 / 2 13 pages as sent to the Federal Register – Oct. 02, 2019 [ p], REG , RIN 1545-BO52, 84 FR 52398

Repeal of IRC § 958(b)(4) – Proposed Treasury Regulations
§ (a)(4)(i) and (vi) Look-through rules as applied to controlled foreign corporations and other entities The term controlled foreign corporation has the meaning given such term by section 957 [and] The term United States shareholder has the meaning given such term by section 951(b) § (g)(4) Constructive ownership of stock Example 4. § (d)(1)(A) Definition of passive foreign investment company Controlled foreign corporation § (c)(5)(i)(C) Interest and original issue discount subject to reporting after December 31, A controlled foreign corporation within the meaning of section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person 2 / 2 13 pages as sent to the Federal Register – Oct. 02, 2019 [ p], REG , RIN 1545-BO52, 84 FR 52398

Overview – Business Interest Expense Deduction Limiters
Business Interest Expense - IRC § 163(j) – Special Rules Single Definition of Int. Exp. – GILTI & Business Int. Exp. Interest Expense Defined for Purposes of IRC § 163(j) – General Rules Interest Expense Defined for Purposes of IRC § 163(j) – Prop. Treas. Reg. § 1.163(j)-1(b)(20) Interest Deductions – International Prop. Treas. Regs. Interest Deductions – Prop. Treas. Reg. § 1.163(j)-7 Interest Deductions – Prop. Treas. Reg. § 1.163(j)-8 Form 8990 Interest Deductions – Proposed Treasury Regulations

Business Interest Expense Deduction Limiters
1 / 3 30% of Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) – 2021 & 30% of Earnings Before Interest and Taxes (“EBIT”) from 2022 – Amended IRC §163(j) - Applies at the consolidated group level – Notice & IR Before NOLs – Prop. Treas. Reg. § 1.163(j)-1(b)(1). Computed for US shareholder without regard to gross income attributable to IRC §§ 78, 951(a), & 951A(a) to prevent double counting. Prop. Treas. Reg. § 1.163(j)-7(d)(1)(i). Exemption for certain trades or businesses: Average annual gross receipts do not exceed $ 25 M for the 3-taxable year period ending with the taxable year which precedes the current taxable year, Performing services as an employee, Electing (irrevocable) real property trade or business, Electing (irrevocable) farming business, Applies to CFCs

2 / 3 Applies to CFCs Exemption for certain trades or businesses (continued): Sale or furnishing of electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; or transportation of gas or steam by pipeline, or Floor plan interest for financing motor vehicles for sale or lease Depreciation and amortization that is capitalized into inventory under IRC § 263A (recovered thru cost of goods sold) is NOT added back IRC §§ 263A and 263(g) capitalizing interest apply before IRC § 163(j) and such interest is not interest for purposes of IRC § 163(j)

3 / 3 Applies to CFCs Foreign related parties are on the cash method of accounting for deductions for certain payments, including interest expense. Treas. Reg. § 1.267(a)-3(b)(1). Cash method of accounting rule applies to subpart F income, but not to GILTI for IRC §§ 163(e)(3)(B)(i) [OID] & 267(a)(3)(B) [item payable to a CFC or PFIC]. Prop. Treas. Reg. §§ 1.163(j)-1(b)(1)(iii) and -3(b)(5) & 1.951A-6(c)(1).

Business Interest Expense - IRC § 163(j) – Special Rules
Properly allocable to a non-excepted trade or business Floor planning interest expense Business interest expense carryforwards – Prop. Treas. Reg. § 1.163(j)-1(b)(2)(9) Special rules – Prop. Treas. Reg. § 1.163(j)-1(b)(2): Disallowed interest expense – Prop. Treas. Reg. § 1.163(j)-3(b)(2) Regarding C corporations – Prop. Treas. Reg. § 1.163(j)-4(b) Regarding consolidated groups – Prop. Treas. Reg. § 1.163(j)-4(d)(2)(iii) Regarding foreign persons engaged in a U.S. trade or business – Prop. Treas. Reg. § 1.163(j)-8(b)(3)

Single Definition of Int. Exp. – GILTI & Business Int. Exp.
The Treasury Department and the IRS have determined that taxpayers and the government would benefit from the application of a single definition of interest for both IRC § 951A(b)(2)(B) and IRC § 163(j) (rather than the application of two partially overlapping, but ultimately different standards). Accordingly, the final regulations define “interest expense” and “interest income” by reference to the definition of interest expense and interest income under IRC § 163(j). See Treas. Reg. § 1.951A-4(b)(1)(ii) and (2)(ii). The regulations under IRC § 163(j), when finalized, will address comments on the validity of the definition of interest expense and interest income that are used in those regulations. Because the final regulations adopt this definition for purposes of determining specified interest expense, the discussion in the regulations under IRC § 163(j) will, by extension, address the validity of the definitions as used in these final regulations. IRC § 163(j) and 951A(b)(2)(B) and Treas. Reg. § 1.951A-4(b)(1)(ii) and (2)(ii)

Interest Expense Defined for Purposes of IRC § 163(j)
1 / 2 Debt versus Equity – Notice 94-47, C.B. 357 Interest is defined as compensation for the use or forbearance of money - Deputy v. Dupont, 308 U.S. 488 (1940) Instrument or contractual arrangement, including a series of transactions, that is treated as a debt instrument for purposes of IRC § 1275(a) and Treas. Reg. § (d) Disallowed business interest deductions under IRC § 163(j) might be limited under IRC § 382(h) for loss corporations with ≥ 50% point ownership changes for certain ≥ 5% S/Hs during a specified testing period. Proposed Treasury Regulations under [ p], [REG ], RIN 1545-BP07, 84 FR 47455, , 76 pages with Preamble when released – 19 pages as sent to the Federal Register , IRC §§ 163(j), 382(h), & 1275(a) & Treas. Reg. § (d) & Prop. Treas. Reg. §§ 1.163(j)-1(b)(20) & Notice 94-47 General Rules

2 / 2 General Rules Conventional debt instruments, as well as transactions that are indebtedness in substance although not in form. Schering-Plough Corp. V. U.S., 651 F.Supp. 2d 219 (N.J. Dist. Ct. 2009), aff’d sub non. Merck & Co., Inc. v. U.S., 652 F.3d 475 (3d Cir. 2011); Mapco Inc. v. U.S., 556 F.2d 1107 (Ct Cl. 1977). Original Issue Discount (“OID”), accrued market discount, and amounts with respect to an integrated transaction - Treas. Reg. § , not stock under Treas. Reg. § Deferred payments treated as interest under IRC § 483 IRC §§ 385 & 1275(a) & Treas. Reg. §§ & & Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

1 / 13 (20) Interest. The term interest means any amount described in paragraph (b)(20)(i), (ii), (iii), or (iv) of this section. In general. Interest is an amount paid, received, or accrued as compensation for the use or forbearance of money under the terms of an instrument or contractual arrangement, including a series of transactions, that is treated as a debt instrument for purposes of section 1275(a) and § (d), and not treated as stock under § , or an amount that is treated as interest under other provisions of the Internal Revenue Code (Code) or the regulations thereunder. Thus, for example, interest includes– (A) Original issue discount (OID), as adjusted by the holder for any acquisition premium or amortizable bond premium; (B) Qualified stated interest, as adjusted by the holder for any amortizable bond premium or by the issuer for any bond issuance premium; Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

2 / 13 (i) In general (continued) (C) Acquisition discount; (D) Amounts treated as taxable OID under section 1286 (relating to stripped bonds and stripped coupons); (E) Accrued market discount on a market discount bond to the extent includible in income by the holder under either section 1276(a) or 1278(b); (F) OID includible in income by a holder that has made an election under § to treat all interest on a debt instrument as OID; (G) OID on a synthetic debt instrument arising from an integrated transaction under § ; Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

3 / 13 (i) In general (continued) (H) Repurchase premium to the extent deductible by the issuer under § (c); (I) Deferred payments treated as interest under section 483; (J) Amounts treated as interest under a section 467 rental agreement; (K) Amounts treated as interest under section 988; (L) Forgone interest under section 7872; Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

4 / 13 (i) In general (continued) (M) De minimis OID taken into account by the issuer; (N) Amounts paid or received in connection with a sale-repurchase agreement treated as indebtedness under Federal tax principles; in the case of a sale- repurchase agreement relating to tax-exempt bonds, however, the amount is not tax-exempt interest; (O) Redeemable ground rent treated as interest under section 163(c); and (P) Amounts treated as interest under section 636. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

5 / 13 (ii) Swaps with significant nonperiodic payments— Non-cleared swaps. A swap other than a cleared swap with significant nonperiodic payments is treated as two separate transactions consisting of an on-market, level payment swap and a loan. The loan must be accounted for by the parties to the contract independently of the swap. The time value component associated with the loan, determined in accordance with § (f)(2)(iii)(A), is recognized as interest expense to the payor and interest income to the recipient. Cleared swaps. [Reserved] Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

6 / 13 (iii) Other amounts treated as interest— Treatment of premium— (1) Issuer. If a debt instrument is issued at a premium within the meaning of § , any ordinary income under § (d)(4) is treated as interest income of the issuer. (2) Holder. If a taxable debt instrument is acquired at a premium within the meaning of § and the holder elects to amortize the premium, any amount otherwise deductible under section 171(a)(1) as a bond premium deduction under § (a)(4)(i)(A) or (C) is treated as interest expense of the holder. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

7 / 13 (iii) Other amounts treated as interest— (continued) (B) Treatment of ordinary income or loss on certain debt instruments. If an issuer of a contingent payment debt instrument subject to § (b), a nonfunctional currency contingent payment debt instrument subject to § , or an inflation indexed debt instrument subject to § recognizes ordinary income on the debt instrument in accordance with the rules in § (b), § (b)(2), or § (f), whichever is applicable, the ordinary income is treated as interest income of the issuer. If a holder of a contingent payment debt instrument subject to § (b), a nonfunctional currency contingent payment debt instrument subject to § , or an inflation-indexed debt instrument subject to § recognizes an ordinary loss on the debt instrument in accordance with the rules in § (b), § (b)(2), or § (f), whichever is applicable, the ordinary loss is treated as interest expense of the holder. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

8 / 13 (iii) Other amounts treated as interest— (continued) (C) Substitute interest payments. A substitute interest payment described in § (a)(7) is treated as interest expense to the payor or interest income to the recipient; in the case of a sale-repurchase agreement or a securities lending transaction relating to tax-exempt bonds, however, the recipient of a substitute payment does not receive tax-exempt interest income. (D) Section 1258 gain. Any gain treated as ordinary gain under section is treated as interest income. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

9 / 13 (iii) Other amounts treated as interest— (continued) (E) Amounts affecting a taxpayer’s effective cost of borrowing. Income, deduction, gain, or loss from a derivative, as defined in section 59A(h)(4)(A), that alters a taxpayer's effective cost of borrowing with respect to a liability of the taxpayer is treated as an adjustment to interest expense of the taxpayer. For example, a taxpayer that is obligated to pay interest at a floating rate on a note and enters into an interest rate swap that entitles the taxpayer to receive an amount that is equal to or that closely approximates the interest rate on the note in exchange for a fixed amount is, in effect, paying interest expense at a fixed rate by entering into the interest rate swap. Income, deduction, gain, or loss from the swap is treated as an adjustment to interest expense. Similarly, any gain or loss resulting from a termination or other disposition of the swap is an adjustment to interest expense, with the timing of gain or loss subject to the rules of § Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

10 / 13 (iii) Other amounts treated as interest— (continued) (F) Yield adjustments. Income, deduction, gain, or loss from a derivative, as defined in section 59A(h)(4)(A), that alters a taxpayer's effective yield with respect to a debt instrument held by the taxpayer is treated as an adjustment to interest income by the taxpayer. (G) Certain amounts labeled as fees— Commitment fees. Any fees in respect of a lender commitment to provide financing are treated as interest if any portion of such financing is actually provided. (2) [Reserved] Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

11 / 13 (iii) Other amounts treated as interest— (continued) (H) Debt issuance costs. Any debt issuance costs subject to § are treated as interest expense of the issuer. (I) Guaranteed payments. Any guaranteed payments for the use of capital under section 707(c) are treated as interest. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

12 / 13 (iii) Other amounts treated as interest— (continued) (J) Factoring income. The excess of the amount that a taxpayer collects on a factored receivable (or realizes upon the sale or other disposition of the factored receivable) over the amount paid for the factored receivable by the taxpayer is treated as interest income. For this purpose, the term factored receivable includes any account receivable or other evidence of indebtedness, whether or not issued at a discount and whether or not bearing stated interest, arising out of the disposition of property or the performance of services by any person, if such account receivable or evidence of indebtedness is acquired by a person other than the person who disposed of the property or provided the services that gave rise to the account receivable or evidence of indebtedness. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

13 / 13 (iv) Anti-avoidance rule for amounts predominantly associated with the time value of money. Any expense or loss, to the extent deductible, incurred by a taxpayer in a transaction or series of integrated or related transactions in which the taxpayer secures the use of funds for a period of time is treated as interest expense of the taxpayer if such expense or loss is predominantly incurred in consideration of the time value of money. Prop. Treas. Reg. §§ 1.163(j)-1(b)(20)

Interest Deductions – International Prop. Treas. Regs.
§ 1.163(j)-7 Application of the business interest deduction limitation to foreign corporations and United States shareholders.[also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C ] Applies to CFCs in computing GILTI and Subpart F income § 1.163(j)-8 Application of the business interest deduction limitation to foreign persons with effectively connected income. [also issued under 26 U.S.C. 163(j)(8)(B).] Applies to foreign persons with ECI Prop. Treas. Reg. §§ 1.163(j)-7 and -8

Interest Deductions – Prop. Treas. Reg. § 1.163(j)-7
1 / 2 Under the general rule, each CFC with business interest expense would separately apply IRC § 163(j) to determine the extent to which that expense is: Deductible for purposes of computing subpart F income as defined under IRC § 952 Tested income as defined under IRC § 951A(c)(2)(A) Income which is effectively connected with the conduct of a US trade or business (“ECI”) IRC § 163(j) and Prop. Treas. Reg. §§ 1.163(j)-7

2 / 2 Alternative method election (same as prior slide plus): Aggregate groups of CFCs with common ownership (80% by value) for IRC § 163(j) deduction determination Goal of alternative method election is smaller interest expense when netted with CFC group member interest income and reduced disallowed interest expense deductions In identifying CFC group members, members of a consolidated tax group are treated as a single person Financial services group is considered to be a separate subgroup IRC § 163(j) and Prop. Treas. Reg. §§ 1.163(j)-7

In general, a non-resident alien individual and non-CFC foreign corporations with ECI will apply IRC § 163(j) subject to certain modifications A CFC with ECI first applies the general rules for determining its disallowed interest expense, which is then allocated between ECI and non-ECI at the CFC level Treas. Reg. § continues to apply regarding the determination of interest deductions. The definition of interest has been expanded to include guaranteed payments for use of capital (“GPUCs”), factoring income, certain hedging items and many other items. Converts IRC § 988 gains and losses on hedges of debt instruments into interest for purposes of IRC § 163(j) IRC § 163(j) and Prop. Treas. Reg. §§ 1.163(j)-1(b)(20) and -8

Form 8990 Form 8990, Limitation on Business Interest Expense Under Section 163(j) (Released Oct. 25, 2018) [3 pages] Draft IRS Instructions to Form 8990 (Dec. 2018) (Released Dec. 10, 2018) IRC § 163(j)

Interest Deductions – Proposed Treasury Regulations
1 / 3 §1.163(j)-0 Table of contents. § 1.163(j)-1 Definitions. [also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C and 7805.] § 1.163(j)-2 Deduction for business interest expense limited. [also issued under 26 U.S.C and 7805.] § 1.163(j)-3 Relationship of business interest deduction limitation to other provisions affecting interest. [also issued under 26 U.S.C and 7805.] § 1.163(j)-4 General rules applicable to C corporations (including REITs, RICs, and members of consolidated groups) and tax-exempt corporations. [also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C and 7805.] § 1.163(j)-5 General rules governing disallowed business interest expense carryforwards for C corporations. [also issued under 26 U.S.C and 7805.] § 1.163(j)-6 Application of the business interest deduction limitation to partnerships and subchapter S corporations. [also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C and 7805.] § 1.163(j)-7 Application of the business interest deduction limitation to foreign corporations and United States shareholders.[also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C and 7805.] § 1.163(j)-8 Application of the business interest deduction limitation to foreign persons with effectively connected income. [also issued under 26 U.S.C. 163(j)(8)(B) and 7805.] § 1.163(j)-9 Elections for excepted trades or businesses; safe harbor for certain REITs. [also issued under 26 U.S.C. 163(j)(7)(B) and (C) and 26 U.S.C and 7805.] § 1.163(j)-10 Allocation of interest expense, interest income, and other items of expense and gross income to an excepted trade or business. [also issued under 26 U.S.C. 163(j)(8)(B) and 26 U.S.C and 7805.] § 1.163(j)-11 Transition rules. [also issued under 26 U.S.C and 7805.]

2 / 3 § 1.263A-9(g)(1)(i) The avoided cost method Interest must be capitalized under section 263A(f) before the application of [other provisions] [§ 1.263A-8 through -15 also issued under 26 U.S.C. 263A(j) and 7805.] § 1.381(c)(20)-1 Carryforward of disallowed business interest. § Table of contents. [§ also issued under 26 U.S.C. 382(m) and 7805.] § (a)(7) and (8) and (b)(3) General rules for ownership change (7) Section 382 disallowed business interest carryforward. (8) Testing period. § (d)(1) Section 382 limitation § (b)(4)(i) and (ii) Allocation of income and loss to periods before and after the change date for purposes of section (4) Allocation of business interest expense. (i) In general. (ii) Example. § (a) Effective date. [§ also issued under 26 U.S.C. 382(m) and 26 U.S.C. 383 and 7805.] § Special limitations on certain capital losses and excess credits. [§ also issued under 26 U.S.C. 382(m) and 26 U.S.C. 383 and 7805.] § (g)(4) Notional principal contracts (4) Swaps with significant nonperiodic payments. For swaps with significant nonperiodic payments, see § 1.163(j)-1(b)(20)(ii). § (b)(2) Rules for certain rental real estate activities Real property trade or business. § (a)(3) and (4) Effective date and transition rules. § 1.860C-2(b)(2) Determination of REMIC taxable income or net loss (2) Deduction allowable under section 163 [§ 1.860C-2 also issued under 26 U.S.C. 860C(b)(1) and 7805] § (a)(5) Determination of interest deduction.

3 / 3 § (a)(6)(ii)(R) and (S) and (vi), (c)(7)(ii)(R) and (S), and (h)(2)(iv) Intercompany transactions. § (d) Net operating losses. § (f)(2) Unified loss rule. § (f) Separate return years (f) Disallowed business interest expense carryforwards. § Table of contents. [§ also issued under 26 U.S.C. 382(m) and 26 U.S.C ] § (e)(2) Application of section 382 with respect to a consolidated group. § (b)(4)(ii)(B) Rules on ceasing to be a member of a consolidated group (or loss subgroup) . § (a) and (b) Coordination with sections 383 and 163(j) (a) Coordination with section 383. (b) Application to section 163(j) § (d) Effective/applicability dates Application to section 163(j) § (i) Treatment of warrants, options, convertible obligations, and other similar interests. 439 pages with Preamble when released – Nov. 27, 2018 121 pages as sent to the Federal Register – Dec. 28, 2018 REG , RIN 1545-BO73, 83 FR 67490

Overview – Base Erosion Anti-Abuse Tax (“BEAT”)
Base Erosion Anti-Abuse Tax (“BEAT”) – Overview BEAT – Base Erosion Percentage (“BEP”) BEAT – BEP Numerator & Denominator Exclusions BEAT – Exception – Services Cost Method (“SCM”) BEAT – Exception – SCM – Categories of Eligible Services BEAT – Base Erosion Payments BEAT – Base Erosion Payments - Interest Deductions BEAT – Cloud Transaction BEAT – Exception - Form 8833 BEAT - Modified Taxable Income (“MTI”) BEAT – Base Erosion Minimum Tax Amount (“BEMTA”) BEAT - Proposed Treasury Regulations BEAT – Form

Base Erosion Anti-Abuse Tax (“BEAT”) - Overview
Only C corps. & US branches of related foreign corps. (≥ 25%) with ECI are liable for BEAT - pay a tax of 10% (5% in 2018 and 12.5% after 2025) of modified taxable income [Banks and security dealer rate is 1% higher per year] BEAT applies to US C corporations & US branches of related foreign corps. (≥ 25%) with ECI which make deductible payments and accruals [allowed versus allowable - optionality], including basis for depreciable property, to related foreign entities (for other than inventory, cost of goods sold, and derivatives contracts) [Optionality will likely be prohibited in Final Treas. Regs.] If the base erosion payments to related foreign entities (≥ 25%) (shifting profits overseas) do not exceed 3% [2% for banks and security dealers] of deductions (a safe harbor) (base erosion percentage) for aggregate group, BEAT does not apply. Deductions exclude NOLs, FDII, GILTI, & DRD Fixed or determinable annual or periodical (“FDAP”) income subject to US WHT at 30% is excluded from BEAT or partially excluded if WHT is reduced from 30% under treaty Group US gross receipts for the prior 3 years must exceed USD 500 M for aggregate group (C corps. & US branches of related foreign corps. with ECI) IRC §§ 52(a), 59A, 172, 245A, 250, & 1563(a) and Prop. Treas. Reg. § 1.59A-1

BEAT – Base Erosion Percentage (“BEP”)
The base erosion percentage for a taxable year is computed by dividing The aggregate amount of base erosion tax benefits (“BETBs”) of the aggregate group (the “numerator”) by The sum of the aggregate amount of deductions plus certain other BETBs of the aggregate group (the “denominator”) A deduction means any deduction allowable under chapter 1 of subtitle A of the IRC [IRC §§ 1 – 1400Z-2] IRC §§ 52(a), 59A, 172, 245A, 250, & 1563(a) and Prop. Treas. Reg. § 1.59A-1

BEAT – BEP Numerator & Denominator Exclusions
The numerator of the BEP excludes deductions for: Amounts paid or accrued to foreign related parties (≥ 25%) for services qualifying for the SCM exception. Prop. Treas. Reg. § 1.59A-3(b)(3)(i) Payments covered by the qualified derivatives payments (“QDP”) exception. QDP recognize gain or loss on a mark-to-market basis at year end. Prop. Treas. Reg. §§ 1.59A-3(b)(3)(ii) & -6 Amounts excluded pursuant to the total loss-absorbing capacity (“TLAC”) exception. Prop. Treas. Reg. § 1.59A-3(b)(3)(v) Certain currency losses under IRC § 988 are excluded from both the numerator and denominator in computing the BEP. Some QDPs are excluded from the denominator. Exclude deductions between members of a consolidated group, see Prop. Treas. Reg. § A(b) For deductions and BETBs from partnerships, see Prop. Treas. Reg. § 1.59A-7(b) IRC §§ 52(a), 59A, 172, 245A, 250, 988, & 1563(a) and Treas. Reg. § (a)(1) & -2 and Prop. Treas. Reg. § 1.59A-1, - 2(d) & (e)(3)(ii)(D), -3(b)(3)(i), (ii), & (v), -6 & -7(b) and A(b)

BEAT – Exception – Services Cost Method (“SCM”)
Payments by a US affiliate of a related foreign entity for services that are eligible for the services cost method (“SCM”), which allows for certain services to be charged at cost with no markup, can escape the BEAT. Treas. Reg. § (b)(5) and Rev. Proc Can cost of eligible services be separated from markup (bifurcation) so that only the markup is subject to BEAT? Yes. A floor colloquy between Sen. Rob Portman (R-Ohio) and Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) that occurred before the tax law’s enactment suggests it was Congress’s intent to allow for that taxpayer-favorable approach for cost under SCM. Does BEAT violate certain US Double Taxation Treaties and / or World Trade Organization (“WTO”) rules? [Taxable in foreign country but partially or totally not deductible in US – Anti- discrimination Article in Double Taxation Treaties – Prevents income stripping from US] IRC § 59A, Treas. Reg. § (b)(5) & (6), (j), (k), & (l)(2) & (3) [without regard to the business judgment test], Prop. Treas. Reg. § 1.59A-3(b)(3)(i) and Rev. Proc

BEAT – Exception – SCM – Categories of Eligible Services
Payroll (4) Premiums for Unemployment, Disability and Workers Compensation (2) Accounts Receivable (4) Accounts Payable (10) Corporate and Public Relations (2) Meeting Coordination and Travel Planning (5) Accounting and Auditing (10) Tax (7) Health, Safety, Environmental and Regulatory Affairs (8) Rev. Proc , Section 3 Budgeting (3) Treasury Activities (4) Statistical Assistance (2) Staffing and Recruiting (13) Training and Employee Development (5) Benefits (7) Information and Technology (IT) Services (8) Legal Services (5) Purchasing (2) Specified Covered Services (101)

BEAT – Base Erosion Payments
A Base Erosion Payment to a related party (≥ 25%) is defined under Prop. Treas. Reg. § 1.59A-1(b)(12) in one of four categories: A payment for which a deduction is allowable; A payment made in connection with the acquisition of depreciable or amortizable property [in recognition or nonrecognition transactions, e.g., exchange - IRC § 351, liquidation – IRC § 332, reorganization – IRC § 368]; Premiums or other consideration paid or accrued for reinsurance that is taken into account under IRC §§ 803(a)(1)(B) [indemnity reinsurance] or 832(b)(4)(A) [gross premiums deducting return premiums and premiums paid for reinsurance]; or A payment resulting in a reduction of the gross receipts of the taxpayer that is with respect to certain surrogate foreign corporations or related foreign persons. A Base Erosion Payment does not necessarily result in BETBs in the yr. of the pymt. IRC §§ 59A, 351, 332, 368, 803(a)(1)(B), & 832(b)(4)(A)

BEAT – Base Erosion Payments - Interest Deductions
For business interest deductions not subject to the limitations of IRC § 163(j)(1) [net interest expense, + 30% of EBITDA + floor plan financing], the interest deduction is treated: first, as foreign related business interest expense and domestic related business interest expense (on a pro-rata basis), and second, as unrelated business interest expense The same principle applies to business interest expense of a partnership that is deductible at the partner level under Prop. Treas. Reg. § 1.163(j)-6(f) IRC §§ 59A and 163(j) and Prop. Treas. Reg. §§ 1.59A-3(c)(4) and 1.163(j)-6(f)

BEAT – Cloud Transactions
Under IRC § 59A, the new BEAT, which effectively limits the ability of US corporations to deduct deductible related-party payments to foreign affiliates (≥ 25%), treatment of a cloud transaction as a service could potentially result in deductible payments qualifying for the services cost method exemption. By contrast, deductible rental payments would generally be subject to the BEAT minimum tax. IRC §§ 59A and 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019.

BEAT – Exception – Form 8833 Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) File if taxpayer believes BEAT is contrary to a US treaty – Non-discrimination rules. Senate ratified the protocol amending the tax treaty with Spain on July 16, 2019, and the protocols amending tax treaties with Switzerland, Japan, and Luxembourg on July 17, Protocols do NOT address BEAT. Senate Foreign Relations Committee has delayed moving forward on new income tax treaties with Chile, Hungary and Poland due to reservations regarding BEAT. If BEAT safe harbor does not apply, consider filing Form 8833 to avoid BEAT. IRC §§ 59A, 6114, and 7701(b)

BEAT – Modified Taxable Income (“MTI”)
Start with taxable income + base erosion tax benefits (“BETB”) + portion of NOL related to BETB (not an NOL C/B or C/O) = MTI IRC § 59A(c) and Prop. Treas. Reg. § 1.59A-4

BEAT – Base Erosion Minimum Tax Amount (“BEMTA”)
Start with MTI X 5% (2018), 10% (2019 – 2025), or 12.5% after 2025 [plus 1% for banks and registered security dealers] [IRC § 15 does not apply to any taxable year that includes January 1, 2018] = Base Erosion Minimum Tax Before Credits Credits = BEMTA IRC § 59A(b) and Treas. Reg. § (d) and Prop. Treas. Reg. § 1.59A-5

BEAT – Proposed Treasury Regulations
1 / 2 § 1.59A-1 Base erosion and anti-abuse tax [also issued under 26 U.S.C. 59A(i).] § 1.59A-2 Applicable taxpayer [also issued under 26 U.S.C. 59A(i).] § 1.59A-3 Base erosion payments and base erosion tax benefits [also issued under 26 U.S.C. 59A(i).] § 1.59A-4 Modified taxable income [also issued under 26 U.S.C. 59A(i).] § 1.59A-5 Base erosion minimum tax amount [also issued under 26 U.S.C. 59A(i).] § 1.59A-6 Qualified derivative payment [also issued under 26 U.S.C. 59A(i).] § 1.59A-7 Application of base erosion and anti-abuse tax to partnerships [also issued under 26 U.S.C. 59A(i).] § 1.59A-8 Application of base erosion and anti-abuse tax to certain expatriated entities. [Reserved] [also issued under 26 U.S.C. 59A(i).] § 1.59A-9 Anti-abuse and recharacterization rules [also issued under 26 U.S.C. 59A(i).] § 1.59A-10 Applicability Date [also issued under 26 U.S.C. 59A(i).]

BEAT – Proposed Treasury Regulations
2 / 2 § (d)(3)(i) Special limitations on certain capital losses and excess credits § Computation of tax liability § (d)(3) Consolidated foreign tax credit § (b)(2)(i)(A) Consolidated accumulated earnings tax § (f)(7)(iii) Consolidated returns by life-nonlife groups § A Application of section 59A to consolidated groups [also issued under 26 U.S.C ] § (b) Corporations exempt from tax [also issued under 26 U.S.C ] § A-1(n)(2) and (3) General requirements and definitions § A-2(a)(3) and (b)(5) Requirement of return [also issued under 26 U.S.C , 6038A, and 6038C.] § A-4 [Amended] § [Amended] 193 pages with Preamble when released – Dec. 13, 2018 42 pages as sent to the Federal Register – Dec. 21, 2018 REG , RIN 1545-B056, 83 FR 65956

BEAT Form Form 8991, Tax on Base Erosion Payments of taxpayers With Substantial Gross Receipts (Released Sept. 5, 2018) [5 pages] Schedule A – Base Erosion Payments and Base Erosion Tax Benefits Schedule B – Credits Reducing Regular Tax Liability in Computing Base Erosion Minimum Tax Amount (BEMTA) IRC § 59A Treasury on September 16, 2019 sent the anticipated final IRC § 59A Base Erosion and Anti- abuse Tax (“BEAT”) regulations to the Office of Management and Budget’s Office of Information and Regulatory Affairs (“OIRA”) for review. At the same time, Treasury also sent a new package of proposed BEAT regulations to OIRA for review. Treasury released comprehensive proposed BEAT regulations on December 21, 2018, which addressed certain of the outstanding questions under IRC § 59A and provided guidance on the application of the gating thresholds and computational matters.

Overview – Foreign Derived Intangible Income (“FDII”)
37.5% of FDII & 50% of GILTI Deductions 37.5% of FDII Deduction – Cloud Transactions 37.5% of FDII QBAI Deduction – GILTI QBAI Rules N / A GILTI, GILTI Ded. & FDII Ded. – St. Inc. Tax – St. by St. Sum. FDII - Proposed Treasury Regulations FDII – Form BEAT & FDII – European Union (“EU”) Reaction

Foreign Derived Intangible Income (“FDII”)
1 / 2 Foreign Derived Intangible Income (“FDII”) US C corporations (not available for individuals (except for electing individuals under IRC § 962), S Corporations, RICs, or REITs) entitled to a FDII deduction may deduct 37.5% (21.875% after 2025) of FDII, effective tax rate of % (16.406% after 2025) on FDII with 21% corporate tax rate FDII is income derived from: Sales or other dispositions of property to a foreign person for a foreign use, A license of IP to a foreign person for a foreign use, and Services provided to a person located outside the US IRC §§ 250 and 951A and Prop. Treas. Reg. §§ 1.250(a)-1 and (b)-1, 1.951A- 6(b)(1), and (b)(1)(i)(A)(2) and (b)(3)

2 / 2 Foreign Derived Intangible Income (“FDII”) Related party transactions qualify for FDII deduction, if property or services are for use by a third party outside the US, established to the satisfaction of the Secretary For FDII deduction compute US version of QBAI deduction in computing GILTI The deductions permitted for 50% of GILTI and 37.5% of FDII are provided under IRC § 250 and are permitted only in the current year (year in which they occur with no C/B and with no C/O). IRC §§ 250 and 951A and Prop. Treas. Reg. § et al

Deduction Eligible Income (“DEI”) = Gross Income – (GILTI + Subpart F Inc. + Financial Services Inc. + Div. From CFC + Dom. O&G Extraction Inc. + Foreign Branch Income) – (Deductions (including Interest Exp.) and Taxes Allocated to Gross Income) Deemed Tangible Income Return (“DTIR”) = QBAI X 10% - Specified Interest Expense (Interest Expense in Allocable Deductions without Interest Income inclusions) Deemed Intangible Income (“DII”) = DEI – DTIR Foreign Derived Deduction Eligible Income (“FDDEI”) = Foreign Revenue – Foreign Revenue Related Cost of Goods Sold = Gross Income – (Allocable Deductions + Taxes) Initial FDII = DII X (FDDEI / DEI) FDII = Initial FDII [Limited by 50% GILTI Deduction & Taxable Income] IRC §§ 250 & 951A and Prop. Treas. Reg. § 1.250(b)-1 IRC §§ 250 and 951A All computations are on a US tax consolidated basis If there is no taxable income, there is no deduction

37.5% of FDII and 50% of GILTI Deductions
Foreign Derived Intangible Income (“FDII”) X 37.5% = FDII Deduction (Global Intangible Low-Taxed Income (“GILTI”) + IRC § 78 gross-up) X 50% = GILTI Deduction Total IRC § 250 Deduction IRC § 250 deduction for FDII and GILTI is limited to taxable income of a domestic corporation (calculated without regard to the IRC § 250 deduction, but with regard to a deduction for an NOL carryover under IRC § 172(a)) IRC § 250 deductions are taken into account in computing taxable income for interest expense deductions limits under IRC § 163(j) [may add back GILTI deduct.] IRC §§ 78, 163(j), 250, and 960(d) & Prop. Treas. Reg. §§ & 1.250(a)-1

37.5% of FDII Deduction – Cloud Transactions
Treatment as a lease or a service would impact the cloud transaction's eligibility for the new IRC § 250 deduction for FDII, specifically, whether the transaction satisfies the various requirements for "foreign use" and documentation because the FDII rules differ for service and lease transactions. IRC §§ 250 and 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-andBM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019.

37.5% of FDII QBAI Deduction – GILTI QBAI Rules N/A
The rules in Treas. Reg. § 1.951A-3 do not apply in determining QBAI for purposes of computing the deduction of a domestic corporation under IRC § 250 for its FDII. See Prop. Treas. Reg. § 1.250(b)-2 (REG , 84 FR 8188 (March 6, 2019)) for the QBAI rules related to the FDII deduction IRC § 250, Prop. Treas. Reg. § 1.250(b)-2, and Treas. Reg. § 1.951A-3

FDII – Proposed Treasury Regulations
1 / 2 § Table of contents. § Introduction. § 1.250(a)-1 Deduction for foreign-derived intangible income and global intangible low-taxed income. § 1.250(b)-1 Computation of foreign-derived intangible income (FDII). § 1.250(b)-2 Qualified business asset investment. § 1.250(b)-3 FDDEI transactions. § 1.250(b)-4 FDDEI sales. § 1.250(b)-5 FDDEI services. § 1.250(b)-6 Related party transactions. § (b)(1)(i)(A)(2) and (b)(3) Limitation of tax for individuals on amounts included in gross income under section 951(a). 47 pages with Preamble when released – Mar. 06, 2019 84 FR 8188, REG , RIN 1545-BO55 1 page - Corrected – 84 FR – Apr. 12, 2019

FDII – Proposed Treasury Regulations
§ (t) Separate taxable income See § for rules relating to the computation of a member's deduction under section 250. § (c)(7)(ii)(T) Intercompany transactions Example 20: Redetermination of attributes for section 250 purposes. § Consolidated section 250. § (f)(15) Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after December 31, Information reporting under section 250. § (g)(4) Information returns required of certain United States persons with respect to controlled foreign partnerships (CFPs) Additional information required to be submitted by a controlling ten-percent or a controlling fifty-percent partner that has a deduction under section 250 by reason of FDII. § A-2(b)(5)(iv) Requirements of return Information reporting under section 250. 2 / 2 47 pages with Preamble when released – Mar. 06, 2019 84 FR 8188, REG , RIN 1545-BO55 1 page - Corrected – 84 FR – Apr. 12, 2019

FDII Form Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) (Released Aug. 22, 2018) [1 page] The above form will be an attachment to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations IRC § 250

BEAT & FDII – European Union (“EU”) Reaction
BEAT legislation is designed to discourage payments to related foreign entities that decrease the US tax base FDII legislation is designed to encourage exports of US goods and services to foreign purchasers The EU has indicated that it will file a complaint with the WTO that BEAT discriminates against foreign trade and FDII provides unfair subsidies to domestic (US) producers of exported goods and services US will argue that FDII and GILTI together lead to “tax neutrality” for business decisions on whether to conduct foreign activities thru a CFC or US corp. at OECD Harmful Tax Practices Forum Oct. 15, 2018 IRC §§ 59A and 250

Branch Income Branch income is a new separate category of income attributable to a Qualified Business Unit FTC against branch category of income must be from branch category of income – no cross crediting of FTCs IRC §§ 904(d)(1)(B) and 989(a)

Hybrid Arrangements “It is important to note that the population of taxpayers affected by section 267A and the proposed regulations under section 267A will seldom include U.S.-based companies as these companies are taxed under the new GILTI regime as well as subpart F. Instead, section 267A and the proposed regulations apply predominantly to foreign-headquartered companies that employ hybrid arrangements to strip income out of the U.S., undermining the collection of U.S. tax revenue. In addition, although section 245A(e) applies primarily to U.S.-based companies, the amounts of dividends affected are limited because a large portion of distributions will be treated as previously taxed earnings and profits due to the operation of both the GILTI regime and the transition tax under section 965, and such distributions are not subject to section 245A(e).” [ p], [REG ], RIN 1545-BO53, Preamble, SUPPLEMENTARY INFORMATION, Special Analyses, I. Regulatory Planning and Review, D. Economic analysis, 4. Anticipated impacts on administrative and compliance costs, second paragraph, 83 FR at

Hybrid Arrangements Hybrid transaction or hybrid entity – no deduction for a specified payment or accrual with related persons (disqualified related party amount), which may achieve double non taxation – Prevents a Deduction / No Inclusion (“D / NI”) outcome. This rule does not apply to the extent that a US shareholder includes the specified payment in income under subpart F or GILTI under IRC § 951(a). Action 2 to OECD’s BEPS project & IRC §§ 245A(e) & 267A are designed to prevent a D / NI outcome. Hybrid transaction - interest or royalty treatment under Chapter 1 of IRC, but not so under tax law of a foreign country. Source based withholding tax on the specified payment will not make the payment deductible. Hybrid entity – fiscally transparent under Chapter 1 of IRC, but not under tax laws of a foreign country or fiscally transparent under tax laws of a foreign country, but not under Chapter 1 of IRC. Deductions disallowed under Chapter 1 of IRC for amount paid or accrued to a related party. IRC §§ 245A(e), 267A, & 954(d)(3) and Prop. Treas. Reg. §§ 1.267A-1, -2(d), -3(b), and -5(a)(19)

Hybrid Rules – Cloud Transactions
Presumably, the classification of a cloud transaction as a service or lease would be irrelevant with respect to IRC § 267A, the new anti-hybrid rules enacted as part of the TCJA, because IRC § 267A only disallows a deduction for certain related-party payments (or accruals) of interest or royalties. IRC §§ 267A and 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019.

Special Rules for Hybrid Dividends
A Dividend Received Deduction (“DRD”) is allowed with respect to the foreign-source portion of a dividend from a specified 10% owned foreign corporation by a domestic corporation which is a US shareholder with respect to the foreign corporation. A DRD is NOT available to a US shareholder of a CFC for a dividend that is a hybrid dividend. A hybrid dividend is a dividend for which the above referenced DRD would be available and the CFC received a deduction (or other tax benefit) under the income tax laws of a foreign country or possession. If a tiered CFC receives a hybrid dividend from a CFC, it is subpart F income that is taxed to the US S/H . FTC is denied for any hybrid dividend. Applies mostly to inbound investors eroding the US tax base. IRC § 245A(a) & (e) and Prop. Treas. Reg. § 1.246A(e)-1.

Hybrid Arrangements – Proposed Treasury Regulations
1 / 3 § 1.245A(e)-1 Special rules for hybrid dividends. [also issued under 26 U.S.C. 245A(g) and 7805.] § 1.267A-1 Disallowance of certain interest and royalty deductions. [also issued under 26 U.S.C. 267A(e) and 7805.] § 1.267A-2 Hybrid and branch arrangements. [also issued under 26 U.S.C. 267A(e) and 7805.] § 1.267A-3 Income inclusions and amounts not treated as disqualified hybrid amounts. [also issued under 26 U.S.C. 267A(e) and 7805.] § 1.267A-4 Disqualified imported mismatch amounts. [also issued under 26 U.S.C. 267A(e) and 7805.] § 1.267A-5 Definitions and special rules. [also issued under 26 U.S.C. 267A(e).] § 1.267A-6 Examples. [also issued under 26 U.S.C. 267A(e) and 7805.] § 1.267A-7 Applicability dates. [Reserved] [also issued under 26 U.S.C. 267A(e) and 7805.]

2 / 3 § (d)-1(b)(2)(iii) and (c) Definitions and special rules for filings under section 1503(d) (iii) A domestic consenting corporation (as defined in § (c)(3)(i) of this chapter), as provided in paragraph (c)(1) of this section. See § (d)-7(c)(41). (c) Treatment of domestic consenting corporation as a dual resident corporation. § (d)-7(c)(41) Examples. § (d)-8(b)(6) and (7) Effective dates (6) Rules regarding domestic consenting corporations. (7) Compulsory transfer triggering event exception. 154 pages with Preamble when released – Dec. 20, 2018 40 pages as sent to the Federal Register – Dec. 28, 2018 REG , RIN 1545-B053, 83 FR 67612

3 / 3 § (f)(13) and (14) Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after December 31, (13) Amounts involving hybrid transactions or hybrid entities under section 267A. (14) Hybrid dividends under section 245A. § (g)(3) Information returns required of certain United States persons with respect to controlled foreign partnerships (CFPs) Amounts involving hybrid transactions or hybrid entities under section 267A. § A-2(b)(5)(iii) Requirement of return. [also issued under 26 U.S.C. 6038A, 6038C, and 7805.] § (a) and (c)(3) Classification of certain business entities (3) Consent to be subject to section 1503(d). 154 pages with Preamble when released – Dec. 20, 2018 40 pages as sent to the Federal Register – Dec. 28, 2018 REG , RIN 1545-B053, 83 FR 67612

Miscellaneous Changes – Transfer of Branch Losses
Certain branch with losses transferred from domestic corporation to Specified 10% Owned Foreign Corporations Include in gross income deductible losses incurred by foreign branch after December 31, 2017 over taxable income after year loss incurred and gain recognized on account of transfer Income treated as sourced in US (income cannot be offset with FTCs) IRC § 91

Miscellaneous Changes – Source of Income
50% of income sourced at place of production and 50% sourced at place of sale repealed Now income is sourced based on place of production activities, NOT transfer of title (former rule) IRC § 863(b)

Executive Compensation Issues Under TCJA
1 / 6 Organizations with top executives employed by foreign subsidiaries and companies involved in a merger may experience unanticipated effects. TCJA expanded the definition of a “publicly held corporation” to include any corporation considered an “issuer” under the Securities and Exchange Act. IRC § 162(m)’s executive compensation deduction limit restricts the deduction public companies can take for compensation of more than $1 million paid annually to a “covered employee.” Under the TCJA, the definition of covered employees has been expanded to include the CEO, CFO and the three most highly compensated officers. The law also eliminated the provision’s exemption for performance-based compensation. IRC § 162(m).

2 / 6 The law included transition relief allowing employers to rely on prior law for compensation arrangements governed by written binding contracts in effect as of November 2, Be aware that: • Contracts renewed after November 2, 2017, are considered new contracts and are ineligible for transition relief. • Contracts that can be terminated or cancelled by either party at will are considered new contracts on the first date they could have been cancelled or terminated. • Plans or agreements granting a compensation committee discretion to reduce or eliminate the size of an award generally are not eligible for transition relief to the extent the compensation may be reduced or eliminated. IRC § 162(m).

3 / 6 Covered employees may not be employed by a US corporation that is subject to US taxation, but by a CFC or a non-US parent corporation. Even though there may be no US tax deduction associated with the covered employee’s compensation on a US tax return, the $1 million deduction limitation may be relevant for calculating income under other provisions that apply US federal income tax rules, such as IRC § 951A, which requires shareholders of a CFC to include in their gross income their GILTI for that tax year. GILTI is not limited by E&P but is based on tested gross income less allowable deductions. IRC § 162(m).

4 / 6 Given some variances between the tax rules and the Securities and Exchange Commission (“SEC”) reporting rules for executives who terminate during the reporting year, it is possible that employees who appear on a proxy, including foreign private issuers (so-called “20-F” or “40-F” filers), are not covered employees, while a former employee who does not appear on the summary compensation table might be a covered employee, depending on the tax period. IRC § 162(m).

5 / 6 Some companies with publicly traded shares may also have one or more subsidiaries with public debt that would be subject to IRC § 162(m) separately. These companies might have to disclose a different group of covered employees from the parent company if the subsidiary has employees who would be treated as named executive officers, and, therefore, are considered covered employees. Applying the compensation deduction limitation could be particularly challenging for certain corporate structures in which compensation payments are made among related entities, such as those involving a mix of US and foreign corporations. Affiliated groups will have to determine which entity is employing which executive and in which country compensation is being deducted. IRC § 162(m).

6 / 6 Under the TCJA, an individual who is a covered employee is always treated as a covered employee, and this applies to payments made after employment ends or made to beneficiaries after a covered employee dies. This means the covered employee group will grow over time and will not be limited to five officers (as it was under prior law). New covered employees may also be added through a merger or acquisition. If a public company that is subject to IRC § 162(m) goes private, the company may continue to be subject to 162(m) for the remainder of its taxable year for which SEC filings are due. IRC § 162(m).

Classif. of Cloud Transact’s & Transact’s Involving Digital Content
Existing Treas. Reg. § provides rules for classifying transactions involving computer programs sourcing income as Statutory (foreign source) or Residual (US source). Cloud computing transactions typically are described for non-tax purposes as following one or more of the following three models: Software as a Service (“SaaS”); Platform as a Service (“PaaS”); and Infrastructure as a Service (“IaaS”). IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 1 / 11

Under Treas. Reg. § (b)(1), a transaction to which the section applies is categorized as a transfer of a copyright right in a computer program; a transfer of a copy of a computer program (a “copyrighted article”); the provision of services for the development or modification of a computer program; or the provision of know-how relating to computer programming techniques. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 2 / 11

Treas. Reg. § (c) provides that a transfer of a computer program is classified as the transfer of a copyright right if there is a non-de minimis grant of any of the following four rights: The right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending; the right to prepare derivative computer programs based upon the copyrighted computer program; the right to make a public performance of the computer program; or the right to publicly display the computer program. Treas. Reg. § (f) further categorizes a transfer of a copyright right as either the sale or license of the copyright right and a transfer of a copyrighted article as either the sale or lease of the copyrighted article. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [84 FR in Federal Register August 14, 2019. 3 / 11

IRC § 7701(e)(1) provides that a contract that purports to be a service contract will be treated instead as a lease of property if the contract is properly treated as a lease taking into account all relevant factors, including whether the service recipient is in physical possession of the property, the service recipient controls the property, the service recipient has a significant economic or possessory interest in the property, the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract, the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and the total contract price does not substantially exceed the rental value of the property for the contract period. IRC § 7701(e)(2) provides that the factors in IRC § 7701(e)(1) apply to determine whether any arrangement, not just contracts which purport to be service contracts, is properly treated as a lease. [IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 4 / 11

Prop. Treas. Reg. § provides rules for classifying a cloud transaction as either a provision of services or a lease of property. Prop. Treas. Reg. § (a) specifies that the rules apply for purposes of IRC §§ 59A, 245A, 250, 267A, 367, 404A, 482, 679, and 1059A; subchapter N of chapter 1; chapters 3 and 4; and sections 842 and 845 (to the extent involving a foreign person), as well as with respect to transfers to foreign trusts not covered by section 679. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 5 / 11

Part of the TCJA (e.g., IRC §§ 59A, 245A, 250 and 267A). Application of the proposed regulations to certain TCJA provisions would depend, in part, on the determination of a cloud transaction as a service or lease of property. For example, under IRC § 59A, the new base erosion anti-abuse tax (BEAT), which effectively limits the ability of US corporations to deduct deductible related-party payments to foreign affiliates, treatment of a cloud transaction as a service could potentially result in deductible payments qualifying for the services cost method exemption. By contrast, deductible rental payments would generally be subject to the BEAT minimum tax. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 6 / 11

Presumably the classification of a cloud transaction as a service or lease would be irrelevant with respect to IRC § 267A, the new anti-hybrid rules enacted as part of the TCJA, because IRC § 267A only disallows a deduction for certain related-party payments (or accruals) of interest or royalties. Treatment as a lease or a service would impact the transaction's eligibility for the new IRC § 250 deduction for FDII, specifically, whether the transaction satisfies the various requirements for "foreign use" and documentation because the FDII rules differ for service and lease transactions. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 7 / 11

Prop. Treas. Reg. § (c)(2) Factors demonstrating classification as the provision of services. Factors demonstrating that a cloud transaction is classified as the provision of services rather than a lease of property include the following factors— (i) The customer is not in physical possession of the property; (ii) The customer does not control the property, beyond the customer's network access and use of the property; (iii) The provider has the right to determine the specific property used in the cloud transaction and replace such property with comparable property; (iv) The property is a component of an integrated operation in which the provider has other responsibilities, including ensuring the property is maintained and updated; 8 / 11

Prop. Treas. Reg. § (c)(2) Factors demonstrating classification as the provision of services. Factors demonstrating that a cloud transaction is classified as the provision of services rather than a lease of property include the following factors— [continued] (v) The customer does not have a significant economic or possessory interest in the property; (vi) The provider bears any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract; (vii) The provider uses the property concurrently to provide significant services to entities unrelated to the customer; (viii) The provider's fee is primarily based on a measure of work performed or the level of the customer's use rather than the mere passage of time; and 9 / 11

Prop. Treas. Reg. § (c)(2) Factors demonstrating classification as the provision of services. Factors demonstrating that a cloud transaction is classified as the provision of services rather than a lease of property include the following factors—[continued] (ix) The total contract price substantially exceeds the rental value of the property for the contract period. IRC §§ 59A, 245A, 250, 367A, and 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 10 / 11

Prop. Treas. Reg. § provides rules for classifying a cloud transaction as either a provision of services or a lease of property. Prop. Treas. Reg. § (a) specifies that the rules apply for purposes of IRC §§ 59A, 245A, 250, 267A, 367, 404A, 482, 679, and 1059A; subchapter N of chapter 1; chapters 3 and 4; and sections 842 and 845 (to the extent involving a foreign person), as well as with respect to transfers to foreign trusts not covered by section 679. IRC §§ 59A, 245A, 250, 367A, 7701(e), Treas. Reg. § , and Prop. Treas. Reg. § , [ p], [REG ], RIN 1545-BM41, 44 pages when issued August 9, 2019, 13 pages when reported at 84 FR in Federal Register August 14, 2019. 11 / 11

Presenter Disclaimer This presentation contains general information only and Presenter is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Presenter shall not be responsible for any loss sustained by any person who relies on this presentation.

L. Thomas Marchlen

Harvard Yale Princeton Club

Similar presentations

Presentation on theme: "Harvard Yale Princeton Club"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Harvard Yale Princeton Club

Similar presentations

Presentation on theme: "Harvard Yale Princeton Club"— Presentation transcript:

Similar presentations

About project

Feedback