Biographical Information Paul R. Caja, Vice President Taxation, MTD - - PDF document
Tuesday & Wednesday, January 2829, 2020 Hya Regency Columbus, Columbus, Ohio Workshop Z International Taxation & Challenges for Multinational Companies after Weathering the Storm of Changes in the Tax Cuts and Jobs Act
Tuesday & Wednesday, January 28‐29, 2020
Hya Regency Columbus, Columbus, Ohio
Tuesday, January 28, 2020 4:15 p.m. to 5:15 p.m.
Biographical Information
Paul R. Caja, Vice President Taxation, MTD Products Inc P.O. Box 368022, Cleveland, Ohio 44136-9722 paul.caja@mtdproducts.com 330.558.3304 Paul has over thirty years of tax experience, with the most recent serving as Vice-President of Taxes with MTD Products Inc, a large privately held manufacturer of outdoor power equipment based in Ohio. As Vice-president he is responsible for the oversight of the worldwide tax function of the Company. These responsibilities encompass all tax compliance, including transfer pricing, financial reporting and tax strategy and development. Prior to joining MTD Products Paul spent the majority of his career with the public accounting firms of Ernst & Young, LLC and PwC, LLC. Paul managed a variety of SEC and privately held accounts. His experience ranges from running a significant outsource engagement to overseeing the financial provisions on large SEC clients. Paul has significant experience in compliance, planning and financial reporting as it relates to state and local, federal and international taxes. Paul has also served as the Federal Tax Manager for American Greetings, Inc. Paul is a certified public accountant and a member
Executives Institute. Paul received his Bachelors of Science in Accounting from Indiana University and he received his Masters of Taxation from Akron University. Todd Behrend, Principal, International Income Tax Ryan LLC, 271 17th St. NW Ste. 2000, Atlanta, GA 30363-6213 todd.behrend@ryan.com 404-682-1210 Mobile: 404-247-6146 Todd is a leader in Ryan’s international tax practice and has advised US and foreign-based multinationals for over 30 years as a partner with the national accounting firms and with Ryan. Todd has extensive experience in advising clients around the world with a focus on tax savings and
many others. Todd is a frequent speaker on international tax and transfer pricing matters both in the US and overseas. Since joining Ryan in 2010, Todd has developed the firm’s international tax and transfer pricing practices with a focus on tax savings and refund reviews in the US and around the world. This has substantially expanded since the enactment of US tax reform in 2017. Todd is a graduate of the University of California at Davis B.S. in Managerial Economics and is a CPA in the State of Georgia. Todd is also a board member for the International Fiscal Association in addition to several privately held companies. Nicholas Mowbray, Attorney, Baker Hostetler, LLP 1050 Connecticut Ave. NW, Washington, DC V 202-861-1704 FAX: 202-861-1783 nmowbray@bakerlaw.com Nicholas Mowbray focuses his practice on U.S. and international tax matters. Nicholas regularly advises clients on ways to enhance the tax efficiency of commercial transactions and operating structures, while also counseling clients in restructurings, acquisitions, joint ventures and dispositions. His work across industries includes advising clients in the areas of asset management, banking, insurance, oil and gas, digital platforms, life sciences and consumer products. Prior to joining the firm, Nicholas spent more than six years in public accounting, working in both Chicago and London. Education: LL.M., Taxation, Northwestern University School of Law, 2014, with honors J.D., Chicago- Kent College of Law, Illinois Institute of Technology, 2010; Student Bar Association, Vice President and B.A., University of Michigan, 2006.
Opportunities and Challenges for Multinational Companies after “Weathering the Storm” of Changes in the 2017 TCJA
29th Annual Ohio Business Tax Conference January 28, 2020
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Todd Behrend Principal Ryan LLC Atlanta, GA todd.behrend@ryan.com Paul Caja VP – Taxation MTD Products Inc Valley City, OH pcaja@mtdproducts.com Nicholas Mowbray Attorney BakerHostetler Washington, DC nmowbray@bakerlaw.com
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It is widely recognized that compliance with the Section 965 toll tax calculation was extremely challenging for all multinational companies Guidance was limited The timeframe was limited The information was not always available and had not been prepared in a
properly detailed way in the past
The rules were extremely complex and when guidance was provided, it was very
late
For these reasons, all companies filed their returns knowing that some elements of their toll tax calculations were likely wrong or incomplete Companies have also undergone foreign tax audits that have changed their pre-2017 liabilities that could positively impact their US taxes in the last 10 years, including 2017 Accordingly, there could be substantial benefits to amending your 2017 federal
return without the constraint of time pressure and more available information and guidance
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What are the benefits of amending 2017 and earlier years? As companies consider how they might amend prior year returns due to the impact of foreign audits that have since closed or are about to close, a substantial opportunity exists to amend multiple prior years and 2017 to: Take FTC’s in a prior year at a 35% rate instead of the reduced Section 965 rates Scrub E&P calculations
2018
more certainty as to any exposures from the original filing.
Review foreign tax returns and tax pools including ensuring the correct use of
foreign exchange rates
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What are some of the opportunities we have seen? Detailed review of foreign tax returns
correct exchange rate as well as the amount of creditable taxes for US purposes
local audits, etc and the pools can be materially understated
the E&P E&P scrub
been made to the foreign E&P ?
certain adjustments are made, the CFC’s E&P could become positive and all taxes would become eligible credits for Section 965
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Opportunities (cont.): Subpart F
be claimed in a prior year against 35% income instead of the reduced rates of Section 965 if the Company had actual or Subpart F dividends in those years ODL /OFL
domestic losses in 2008-2010, for example. This is an area that can provide meaningful foreign source income if it was not carefully tracked in prior years. General basket Carryforward
against their 965 liability due to OFL’s, etc »This This is now an asset to be optimized going forward against future low-taxed general basket income such as subpart F, 863(b), etc.
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What should companies be considering for their transfer pricing with the new rules with a lower federal rate and the DRD on foreign dividends? For decades, the general rule of international tax planning was that it was almost always more beneficial to earn a dollar of profit in the foreign country than in the US The US rate was 35% plus state and all countries were lower than that by 2015 This put US companies generally in conflict with the IRS and on the same side as the foreign tax authorities when it came to transfer pricing disputes After 2017, this dynamic has switched with most jurisdictions around the world having a higher corporate income tax rate than the US
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Does it really make sense to shift income back to the US? In many cases, the answer is yes Let’s take Mexico and Canada as our first examples: Mexico
rates of 30%+
Canada
province.
benefits of shifting income to the US are limited unless the income would benefit from the FDII regime.
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What about Europe? For countries like Italy, France and Germany, the rates are significantly higher
than in the US.
Other countries such as the UK and the Netherlands have lowered their rates
Subpart F – Is this now a potential benefit for companies with FTC C/F’s? Many companies now have excess FTC’s in their general basket that they could
not use against their toll tax due to OFL’s, etc. Arrangements that generate additional low-taxed Subpart F income would be covered by FTC C/F’s as a way to use an asset that otherwise is not utilized.
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The GILTI rules have created many surprises for MNCs The application of the 861 expense allocations against GILTI income caused many Companies to be taxable in 2018 on their GILTI income even though it was taxed at a rate much higher than in the US The “use it or lose it” rules for FTCs in the GILTI basket severely limit much of the FTC planning that companies had been able to do in the past with blending high and low taxed income over time and the ability to carry forward FTCs The compliance burden with all foreign companies being subject to US tax every year has been a huge challenge to tax departments who are just now able to understand how GILTI is impacting them and what to do about it Nearly all tax planning now involves complex quantitative modeling
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GILTI– How can companies minimize the impact of these rules? A few ideas: High tax election – does this limit companies’ ability to blend high and low
taxed GILTI basket income?
The high tax election announced in proposed regulations in 2019 allows
companies to reduce the compliance burden on many of their high-taxed subsidiaries
Purchasing structures – Opportunities to take advantage of offshore
purchasing teams
For companies that have substantial offshore purchasing operations and functions, putting that into a low-taxed structure and paying it an arms length commission could shift US income offshore and reduce the US tax on the income from 21% to 10.5%
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Ideas (cont.): FDII vs GILTI on IP structures For companies in low-tax jurisdictions, new planning may also be considered After application of the new GILTI regime, many foreign companies will still be subject to at least a rate of 10.5%. If this income can instead be subject to tax at the FDII rate of 13.125%, the extra cost and BEPS risks
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Proposed regulations addressing the GILTI high-tax exception were issued in June 2019 (REG-101828-19), with Treasury commenting in late 2019 that final regulations will be issued in Q1 of 2020 Permits U.S. shareholders of a CFC to elect to exclude from “gross tested income” amounts that have been subject to foreign tax at an effective rate that exceeds 90 percent of the U.S. rate of 21 percent (i.e., greater than 18.9 percent) Applies to all tentative gross income items of a CFC, at the level of each QBU “All or nothing” for CFCs that are commonly controlled Binding on all U.S. shareholders of the CFC If election is revoked, cannot be made again for five years Election only applies to taxable years of CFCs beginning on or after the date the proposed regulations are finalized
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Potential changes from proposed regulations: Prospective application only Eligibility determined CFC-by-CFC basis Annual election 90 percent threshold applied to a rate of 13.125 percent
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1. Identify each QBU of a CFC 2. Determine the gross tested income, by basket, attributable to each QBU 3. Adjust QBU income for disregarded items 4. Allocate and apportion QBU deductions to arrive at “tentative net tested income items” 5. Determine the foreign taxes that are “properly attributable” to each tentative net tested income item 6. Determine whether the foreign effective tax rate for each tentative net tested income item is greater than 18.9% using the following formula:
Identifying high-taxed tested income: multi-step process Properly attributable taxes Tentative net tested income item Properly attributable taxes
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Manner Scope Duration Revocation
specified information
items of all CFCs that are members of a controlling domestic shareholder group
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Optimizing Mexican Business Structures – What can companies do now? There are few unique aspects of doing business with Mexico that companies should consider Mexican purchasing structures Companies that are making substantial purchases from non-Maquila Mexican suppliers should consider trying to take advantage of the new GILTI rules by setting up a purchasing structure This would be similar to some of the other offshore purchasing structures that have been used over the years from places like China Typically, this would involve moving existing Mexican sourcing resources into a low-taxed Mexican purchasing structure and paying an arms- length commission from the US The new structure would be subject to GILTI tax at 10.5% instead of 21% plus state before this shift
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Impact of new 863(b) rules for Maquiladoras This is a new and unique opportunity for companies with excess foreign tax credits in their general basket that they are not able to use after the Toll charge Under the revised sourcing rules under Section 863(b), income from products made outside the US and sold within the US is sourced entirely to where the product is manufactured This means that 100% of the profit from any product manufactured in Mexico by a Mexican Maquiladora (or checked entity) and sold by the US company is foreign sourced. By quirk of the new basketing rules, the income would be general basket income and not available to utilize excess credits from the Mexican branch in the branch basket
have to have excess credits or carryforwards in its general basket
their credits that came back with the toll charge
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Branch basket planning Companies with “checked” maquiladoras are now bringing High-taxed income
into the new branch basket and have excess credits as a result
Companies should consider planning to increase low-taxed income in branch
structures to more efficiently utilize Mexican tax credits
Transfer pricing shifts from Mexico to US Is it time to move away from the safe harbor in Mexico? For nearly 2 decades US companies have complied with the Mexican “safe
harbor” rules that allow for an APA in Mexico using a markup that has typically been above a real arms length margin for Maquila activities
The IRS has chosen not to challenge this as a practical matter, but it has always
been an effective “gift” from the US to Mexico
Companies should consider abandoning the safe harbor and revise their transfer
pricing with Mexico to reduce the Mexican profit to more clearly reflect the arm’s-length principle
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New Mexican disclosure rules Not an opportunity but a word of caution about the recent Mexican tax “reform” There are quite a few onerous compliance requirements that have been adopted in the recent Mexican tax reform. This legislation effectively reads like they adopted every bad idea the OECD ever considered and will lead to a lot of unintended consequences such as:
their executives
tax motivation
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Final regulations under I.R.C. §§ 864(c)(8) and 1446(f) (relating to gain or loss to foreign persons from the sale or exchange of an interest in a U.S. partnership engaged in a U.S. trade or business and finalizing REG 113604-18 and REG 105476-18 issued in late 2018 and May 2019, respectively) Final regulations under I.R.C. § 267A (relating to hybrid transactions and finalizing REG 104352-18 issued in late 2018) Guidance on foreign tax credit issues under I.R.C. §§ 78, 861, 901, 904, 905 and 960 (relating to foreign tax credits and expanding upon final regulations (T.D. 9882) and proposed regulations (REG 105495-19) issued on December 17, 2019) Regulations under I.R.C. §§ 959 and 961 (addressing previously taxed earnings and profits and expanding upon Notice 2019-01) Final regulations under I.R.C. § 250 (relating to foreign-derived intangible income and global intangible low-taxed income deductions and finalizing REG 104464-18 issued on March 6, 2019) Final regulations on I.R.C. § 951A (relating to high-tax exception and finalizing REG 101828-19) Final regulations under I.R.C. § 245A (relating to limitations on the participation exemption and temporary regulations (T.D. 9865) and proposed regulations ( REG 106282-18) issued on June 18, 2019) Regulations under I.R.C. §§ 367 and 482 (addressing changes made by the TCJA that require the IRS to value intangible property)
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