More than half a year after the ground shifted beneath tax compliance processes under the Tax Cuts and Jobs Act, companies are still trying to steady themselves and understand what it means going forward.
The Internal Revenue Service is buzzing trying to develop the necessary regulatory guidance, especially on the international tax provisions that are most critical and most confusing to multinational public companies. “We understand they are working pretty long days to try to provide guidance,” says Joe Calianno, a tax partner and leader of the international tax practice at BDO.
The IRS issued a number of notices and then proposed regulations that give companies a fairly clear indication of what to expect under Section 965 of the Tax Cuts and Jobs Act, which requires companies to pay a repatriation tax on their share of accumulated foreign earnings and profits. Tax rules dating back to the mid-1980s allowed companies to accumulate and reinvest foreign earnings from U.S. federal income tax until those funds were repatriated or brought back into the United States.
“The proposed regulations answered a lot of questions with respect to the repatriation tax, but it doesn’t mean there are not a lot of issues relating to other areas of tax reform out there,” says Calianno.
Tax departments are largely overwhelmed by the enormity of change that has occurred under the tax reform measure, especially with respect to the repatriation provisions, says Aaron Payne, a partner at law firm Eversheds Sutherland. “Companies are still very much scrambling trying to figure out what the guidance is going to be, and now in this particular area, what it is,” he says. “They need to crunch a lot of numbers and see what it means for them.”
For calendar-year companies that will file their 2017 tax returns in October, the IRS guidance issued to date answers some of the most pressing questions, says Payne. It also provides some new elections that companies will need to make.
Determining the foreign earnings and profits that are allocated to any given business is highly complex, so the guidance attempts to provide elections for making basis adjustments that will help companies identify their potential repatriation liabilities. “These are elections that need to be made with the tax return in the year of inclusion,” says Payne.
Given the timing of the guidance in relation to extended tax return filings, it’s possible some companies will even need to consider amending returns to make the necessary elections, he says. “It’s not entirely clear yet,” he says.
“The proposed regulations answered a lot of questions with respect to the repatriation tax, but it doesn’t mean there are not a lot of issues relating to other areas of tax reform out there.”
Joe Calianno, Tax Partner & Leader of the International, Tax Practice, BDO
Bigger areas of uncertainty under tax reform surround the new provisions around “global intangible low-taxed income,” or GILTI, and the provisions around the “base erosion and anti-abuse tax,” or BEAT, says Calianno. “There are a lot of areas there that the IRS and Treasury need to fill in,” he says.
GILTI is intended to impose tax on intangible income abroad that is subject to low tax in other jurisdictions, presumably to protect it from U.S. tax, says Brent Felten, managing director of international tax at Crowe. The language companies have seen so far doesn’t make clear how intangible income will be distinguished from other types of income, he says, producing a great deal of uncertainty about how the tax will be imposed.
By applying a strict interpretation of the language that exists, companies are arriving at harsh estimates that tax experts generally believe to be inconsistent with legislators’ intent, says Felten. “I don’t think you can really get reasonable estimates,” he says. “There’s a lot more guidance needed here.”
A big unknown in the interpretation of the GILTI tax is how foreign tax credits may be factored into the equation, says Natan Leyva, a partner at law firm Vinson & Elkins. GILTI is intended to provide a lower tax rate on intangible income, he says, but the interaction of the legislative language with language on foreign tax credits is not favorable to taxpayers. “Taxpayers are definitely hoping there’s going to be more guidance,” he says.
BEAT interpretation is also becoming very broad, says Leyva. While it was originally viewed as affecting investments inbound to the United States, it also applies to various types of payments U.S. companies would make to their subsidiaries abroad, even if the subsidiaries abroad are also paying tax on the same amounts in their home jurisdictions. Companies are still looking for guidance on BEAT computation, he says.
The continued uncertainty about how companies will ultimately be affected by the Tax Cuts and Jobs Act is resulting in continued uncertainty about what to say to investors in financial statements, says Felten.
Under Staff Accounting Bulletin No. 118, the Securities and Exchange Commission gave companies some time to digest the broad-reaching tax measure before they would be required to tell the entire story to investors in the period of enactment, which is the normal requirement under GAAP. Under SAB 118, companies are required to disclose what they can, use provisional amounts and disclosures where they can reasonably provide them, and update them quarterly, taking no more than a year to get to the conclusion of their analysis.
For calendar-year companies, that gives them until their 2018 year-end financial statements to wrap up the disclosure and state with certainty how the company is affected. “Companies are moving along that continuum,” says Felten. “The ones that are having the most difficulty are those that are being caught, for example, by GILTI but aren’t the target of GILTI.”
While tax experts may want to wait for the dust to settle on some GILTI guidance before making definitive disclosures to investors, financial statement auditors are more inclined to hold their feet to the fire, says Felten. “A lot of people are hoping to get this fixed,” he says. “Some are caught in discussions with financial auditors saying ‘we weren’t the target of this,’ but the auditor is saying what’s written is clear, so you can make a reasonable estimate. That’s where the rub is now on SAB 118.”