It’s been a couple of tax cycles since the most comprehensive legislative revisions to the tax code in more than three decades were enacted. To take a look back, focus on the present, and take a quick look at the future concerning its impact on international tax issues, we convened a superb panel of corporate tax practitioners in this space, including Kent Cain, international tax director at The Michaels Companies in Texas and vice chair of the U.S. international tax committee for TEI; Peter Waterstreet, international tax director at VMware in Palo Alto, California, and past chair of the U.S. international tax committee for TEI; and Sarah Winters, chief tax officer and global treasurer for Cushman & Wakefield and the current chair of the U.S. international tax committee for TEI. Michael Levin-Epstein, Tax Executive’s senior editor, moderated the discussion.
Michael Levin-Epstein: What’s your assessment of how the landmark tax legislation has been implemented so far when it comes to international tax issues?
Peter Waterstreet: Certainly it’s a sweeping change. Many have debated whether it can be considered true tax reform or is something different, but nonetheless passage of the [2017 Tax Cuts and Jobs Act] legislation had a great impact on U.S. international tax compared to the last major reform back in 1986. Treasury has had a massive undertaking to issue guidance around all of the new TCJA provisions, and, given the size and scope of that responsibility, I think they’ve done a remarkable job. Nevertheless, as companies prepared for the last filing season, there was still a lot of outstanding guidance—late-breaking guidance—and one of the challenges that we faced was making various decisions on filing positions to be taken for which the guidance was just not there. We had to make our best guess and use reasonable judgments—to have a “reasonable method, consistently applied,” I think is the language that has often been used to describe an appropriate approach when facing the lack of specific guidance. While there’s still more expected, much of that guidance has since come out, so I think that’ll improve the next filing season.
Kent Cain: I would certainly echo Peter’s comments regarding the timing of the legislation and related guidance. The legislation was passed just before the holidays in December 2017, and, as a result of the timing, no one had the time to completely absorb the new provisions before having to account for the impact in the 2017 tax provision and try[ing] to understand how GILTI [global intangible low-taxed income] and the other provisions would impact the effective tax rate for 2018. Luckily, from an accounting standpoint, companies were able to make use of SAB 118 to account for the tax provision impacts of TCJA over a twelve-month period. Turning to compliance, the IRS put out some guidance for the transition tax to help companies with the upcoming 2017 tax return. There were some unanswered questions about reporting the transition tax, but I feel like 2017 compliance was not as challenging as 2018 despite having another year to grapple with the provisions that went into effect in 2018 like GILTI, FDII [foreign-derived intangible income], BEAT [base erosion anti-abuse tax], Section 163(j), and the modified foreign tax credit provisions. I feel like there were more unanswered questions related to a lack of guidance that we had to deal with in completing the 2018 tax return. The new forms for 2018, including the updated Forms 5471 and 1118, were significantly more complex and required much more information, adding to the compliance process. The instructions in many cases were also lacking in providing guidance. Finally, the software providers didn’t seem to have their products fully vetted for the new tax provisions and forms. I do realize that tax reform placed a huge burden on the IRS and the software companies. Overall, I agree that they did an admirable job, given the complexity of the tax law changes and the time they had in which to deal with the changes.
Sarah Winters: The IRS has done the best that they could with the speed at which the legislation was approved. I am fairly impressed with the ability of the IRS to react so quickly with the significant amount of legislation and the regulations that had to be issued. We’ve had thousands of pages of regulations after the law was passed, so the IRS dedicated significant resources. I do think they did the best that they could. There’s still some issues with respect to the basic law, technical corrections, and issues that some of the regulations have gone beyond, legally, where they were allowed to go. One of the biggest issues was the speed at which the law was passed and the timing, given it was so late in December; there was a lot of uncertainty as to how to account for that in our financial statements for year-end 2017. That was quite a challenge. That was probably our biggest challenge. We didn’t have the necessary people on board to address the legislation until a year later, but we’re moving forward and forging forward with the information as it comes out.
Implementation of Regulation & Guidance
Levin-Epstein: In terms of implementation of the regulation and guidance, what are the most problematic areas?
Waterstreet: I think we’re going to face a lot of administrative challenges. TEI is highly focused on fairness and administrability. There are concerns about 905(c), for example, requiring the amending of past returns, which is a significant burden, not only at the federal level but [also] at the state level. How many times will an amended return be required because of a foreign tax redetermination in any number of the foreign jurisdictions in which taxes may have been incurred that are being reflected in the U.S. return? And what other implications does that have? Companies also have to grapple with that from a financial statement standpoint—as Sarah has mentioned, it was having to deal with the provision aspects on the initial passage of the law—but this is ongoing as well, and, you know, statutes of limitations in foreign jurisdictions can vary over many, many years. It just seems like there is a significant burden in administration of that provision. So that’s one area where simplification would be very welcomed, as the practical complexity of strict compliance with that is going to be challenging.
Cain: I agree that the foreign tax credit area may be the area in most need of further guidance despite the number of regulations already issued. The changes to the foreign tax credit regime were significant. The new provisions such as GILTI, FDII, and BEAT, along with the Section 163(j) changes, seemed to get more press, but the foreign tax credit changes were significant, and there is still a need for a great deal of guidance. There are other provisions in the new law where technical corrections [are] needed, but the political environment is preventing that from happening. This is concerning. The IRS has tried to address some of these issues via regulations where it is not clear they have the authority to do so. Another area that needs more focus is training of IRS personnel. I’ve spoken to a couple of people who are dealing with audits or are in the CAP program who have said they are essentially training the examining agents themselves, because the agents don’t understand the new law. It seems that their training to date has been cursory at best.
Winters: I would agree that foreign tax credit is one of the more challenging areas, as well as BEAT. As Peter mentioned, TEI has been advocating on behalf of taxpayers, and as a committee, the U.S. international tax committee for TEI has provided comments on the regulations and how they should be interpreted or applied in both the foreign tax credit and the BEAT area. With respect to BEAT, given [that] it is a new concept, whenever you have a new concept you run into challenges.
Deconstructing the Foreign Tax Credit and BEAT
Levin-Epstein: What’s the key issue with the foreign tax credit and BEAT?
Waterstreet: One area in the foreign tax credits, I guess perhaps expanding on my previous comments: the lack of the ability to pool foreign taxes seems to require a very large tracking schedule. We’ve already seen the size of 5471 forms increase dramatically with various new questions that are designed to capture issues that have become part of the law under the TCJA, and it seems that those schedules might further increase in size as we tack on additional-year layers of foreign taxes for each CFC [controlled foreign corporation]. The number of baskets of earnings and profits and associated taxes that have to be tracked, I think, is an area that may need more guidance and hopefully simplification.
On BEAT, you know, we did get some good recent guidance, including the flexibility to waive deductions for all purposes of the federal income tax in order to avoid being an applicable taxpayer subject to the BEAT liability. I think that in the face of incurring a very high BEAT liability, forgoing a deduction would probably seem to be an easy out, if you will. I thought that was helpful guidance.
Cain: I feel like the foreign tax credit is the area in most need of more guidance. Peter mentioned the number of baskets and the complex effort that will be needed for tracking. I also believe we need further guidance on how to basket foreign taxes, such as withholding taxes, on distributions of PTEP [previously taxed earnings and profits]. And then PTEP itself is an area where we need more guidance related to the nineteen or so categories of PTEP listed in a notice issued by the IRS in December of 2018. I don’t deal so much with BEAT, since we don’t typically make outbound payments that would be subject to BEAT.
Winters: The IRS needs to consider some amount simplification, because the two biggest challenges that we face are information gathering and availability of information to meet the increased calculations needed for reporting. We have added more than one person to prepare all these calculations and complete the reporting. The increased burden itself has been very material to companies, so as the IRS thinks further about tax reform and the regulations and the application, they need to also think about how they can reduce the burden on the taxpayers.