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Decoding H.R.1-Tax Cuts and Jobs Act Symposium: Challenges & OpportunitiesInternational Tax Law Panel:Stewart L. Kasner , Esq., Holland & Knight LLPJennifer J. Wioncek, Esq., Bilzin Sumberg

St. Thomas University School of LawApril 19, 2018

Relevant Outbound Changes

Ø Section 965- Deemed Repatriation or Transition Tax

Ø Section 245A- Dividends Received Deduction

Ø Sections 902 et seq - Foreign Tax Credit Changes

Ø Section 951A- Global Intangible Low Taxed Income (“GILTI”)

Ø Section 250- Foreign Derived Intangible Income (“FDII”)

Ø Section 951(a) - Repeal of 30 Day Rule

Ø Section 367- Relevant Changes

Ø Section 958(b)(4) - Downward Attribution under Subpart F

Relevant Inbound Changes

Ø Section 163(j)- Interest Stripping Rules

Ø Sections 864(c)(8) &1446(f)- Sale of Partnership Interests by NRAs

Ethical Considerations Ø Representing private clients with undeclared income or assets in a foreign jurisdiction

Agenda

Selected Outbound Changes

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Code Section 965 Deemed Repatriation or Transition Tax

Ø Who is impacted?Ø 10% U.S. Shareholders (corporate and individuals) of Specified Foreign Corporations (“SFCs”)

which are defined as: Ø (1) Controlled Foreign Corporations (“CFCs”), and Ø (2) Foreign corporations with at least one 10% U.S. shareholder that is a domestic corporation

Ø What is deferred foreign income?Ø Pro rata share of accumulated post-1986 accumulated earnings and profit (“E&P”)

Ø as of either November 2, 2017 or December 31, 2017 (whichever date is greater) Ø E&P must be accrued while foreign corporation was an SFC (note for new US residents)Ø Can be reduced by SFCs with foreign E&P deficitØ Does not include previously taxed income (“PTI”), or effectively connected income (“ECI”)Ø Calculated based upon last tax year beginning before Jan. 1, 2018

Ø Applies to 2017 for calendar year SFCs, and 2018 for fiscal year SFCs (tax due in 2019)

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Code Section 965 Deemed Repatriation or Transition Tax

Ø Effective Tax Rates on foreign “cash” and “non-cash” portions Ø Corporations: 15.5% on cash (44% of 35% rate), 8% on non-cash (23% of 35% rate)

Ø Corporate tax liability can be offset by foreign tax credits (but prorated on taxable portion of income)Ø Individuals: 17.5% on cash, 9.05% on non-cash (for 2017, calendar year SFCs)

Ø For individuals, tax rate increases to 27.31% on cash, 14.1% on non-cash for 2018 (fiscal yr SFCs)

Ø Cash position includes:Ø Cash, net accounts receivable, Ø FMV of marketable securities, commercial paper, CDs, foreign currency, obligations <1 yrØ As of close of last tax yr beginning before Jan. 1, 2018

Ø unless avg of 2 prior tax years ending before Nov. 2, 2017 is greater.

Ø Payment of Section 965 Tax due April 17, 2018 (for 2017, calendar yr SFCs)Ø US Shareholders can elect to pay tax in installments

Ø 8% for the 1st five years starting in April 2018 (for the 2017 tax year), Ø 15%, 20% and 25% respectively for the last three yearsØ Income subject to deferred tax can be distributed currently without accelerating tax due.

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Code Section 965 Deemed Repatriation or Transition Tax

Deferral of Section 965 Tax Liability by S corp shareholdersØ Each S corp shareholder can elect to defer the tax indefinitely, or until triggering event.

Ø SFC stock must be held through S corp on or before 12/31/2017.Ø S corp shareholder must report deferral election each year.Ø S corp. to file statement in 1st year, with K-1 to shareholder(s)Ø S corp and shareholder joint and severally liable for deferred tax.Ø Income subject to deferred tax can be distributed currently without accelerating tax due.

Ø Triggering events include:Ø (i) S Corp ceases to be an S Corporation (or is disqualified); Ø (ii) S Corporation liquidates, sells all assets or ceases business; or

Ø Can’t defer immediate tax liability on this triggering event w/o IRS consent.Ø (iii) Individual shareholder of S Corp transfers shares but transferee does not assume tax liability.

Ø Partial trigger is possible.

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§ 100% dividends received deduction

§ Applies to foreign-source dividends from a “specified 10% owned foreigncorporation” after Dec. 31, 2017

§ PFICs are excluded (if not also a CFC)

§ Must be a “US Shareholder” under §951(b) (i.e., 10% shareholder byvote or value)

§ DRD applies only to US corporate shareholders

§ S corporations not eligible for DRD

§ "Foreign-source portion of dividend": excludes ECI and domestic corpdividends received by 10% owned foreign corp

§ Note that there is no similar exemption for foreign source incomeearned through a foreign branch

Participation Exemption System: New §245A

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§ "any dividend received" to be interpreted broadly (Conference Report)

§ Direct actual dividends

§ §1248 amounts (§1248(j) as amended)

§ Gain on sale of lower-tier CFC treated as dividends (§964(e))

§ Lower-tier CFC dividends that are subpart F income

§ Divs. indirectly received through a partnership (Conference Report)

§ Dividends excluded

§ "Hybrid dividends": If jurisdiction of residency of CFC grants a deduction for payment ofdividend, Section 245A deduction disallowed

§ PFIC purging distributions

§ One year holding period requirement (§246(c))

§ US C corporation shareholder must have held the shares on at least 366 days during 731-dayperiod beginning on the day that is 365 days before the ex-dividend date

§ FTCs (or deduction) denied for taxes on dividends for which DRD is allowed

Participation Exemption System: New §245A

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§ Stock basis in foreign corporation shares is reduced by amount of DRD forpurposes of determining a loss of a domestic corporate shareholder(§961(d))

§ Excess foreign branch loss on transfer to specified 10% owned foreigncorporation (New §91)

§ Transferred loss amount included as US source gross income oftransferring domestic corporation

§ Applies to foreign branch losses incurred after Dec. 31, 2017

§ Similar rule previously existed in §367(a)(3), i.e., branch lossrecapture rule

§ To prevent taxpayers from claiming branch losses, then converting tocorporation and claiming DRD once profitable

Participation Exemption System: New §245A

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§ Repeal of §902 indirect tax credits for domestic corporations

§ §960 modified to apply only to the extent foreign taxes are imposed on subpart Fincome or GILTI income of domestic corporate shareholders of CFC

§ Section 78 applies except with respect to §245 and new §245A (i.e., deemeddividend does not receive benefit of participation exemption)

§ New §250(a)(1)(B) applies deduction to §78 gross-up amount that isattributable to GILTI inclusion under §951A

§ US corporation will need to exclude its foreign source dividends from computation of§904 FTC limitation if DRD applies under §245A

§ §863(b) modified source of income rule for determining when sales of inventory willbe treated as foreign source

§ Determined solely on basis of production activities

§ Title passage not determinative

§ §904(d) modified to apply separate FTC limitation basket for foreign branch income

§ Partial foreign tax credit may be used to offset §965 transition tax

Modifications to Foreign Tax Credit Rules

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Code Section 951A Global Intangible Low-Taxed Income (“GILTI”)

GILTI is a new category of Subpart F income attributed to US Shareholders of CFCs.Ø Formula backs into a deemed intangible income inclusion amountØ Exempts certain types of income, and compares remaining gross income to artificial 10% deemed return

on depreciated cost bases of specified tangible property used in a trade or businessØ Depreciated costs bases is computed using alternative depreciation system under IRC s. 168(g).Ø Only takes into account specified tangible property used in the production of tested income.

Ø Taxed at ordinary income tax rates, with a deduction for domestic C corporationsØ After tax GILTI treated as PTI, not subject to second level of tax on distribution

GILTI tested income starts with the gross income of each CFC and then excludes:Ø (1) effectively connected income (“ECI”), Ø (2) Subpart F income, Ø (3) high-taxed income (taxed at rate exceeding 90% of U.S. corporate income tax rate, i.e., 18.9%), Ø (4) dividends from related subsidiaries with >50% vote or value, and Ø (5) foreign oil and gas extraction income.

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Code Section 951A Global Intangible Low-Taxed Income (“GILTI”)

Deduction available only for domestic C corporation shareholders of CFCsØ TYs 2018-2025: deduction equal to 50% of GILTI (effective tax rate of 10.5%)Ø TYs after 2025: deduction equal to 37.5% of GILTI (effective tax rate of 13.125%)

Deemed paid foreign tax credits available to domestic C corporationsØ 80% of the foreign taxes paid and attributable to GILTI inclusion. Code s. 960(d)(1).

Potential Planning OpportunitiesØ Code s. 962 election to treat individual CFC shareholder as a domestic C corporation

Ø GILTI taxed at corporate rates (with corresponding deduction)Ø Allows foreign tax credit to be claimed as if individual shareholder were a domestic C corporation.Ø Tax due on actual payment of (qualified) dividend from “domestic C corporation”

Ø US shareholder must be CFC shareholder on last day of tax year to be subject to GILTI tax.

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Code Section 250 Foreign Derived Intangible Income (“FDII”)

FDII is the amount of a US C corporation’s “deemed intangible income” generated from:Ø Property sales (leasing or licensing) to non-U.S. persons for foreign use,Ø Services provided to non-U.S. persons or with respect to foreign property.

1st, determine the percentage of deduction eligible income from foreign use property sales or srvcs

Ø Deduction eligible income equals net income excluding:Ø (1) Subpart F incomeØ (2) GILTIØ (3) Financial services incomeØ (4) Dividends from CFCsØ (5) domestic oil and gas extraction income, and Ø (6) active foreign branch income.

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Code Section 250 Foreign Derived Intangible Income (“FDII”)

2nd, reduce deduction eligible income by deemed tangible income return (10%), to calculate deemed intangible income

Ø deemed tangible income return equals deduction eligible income, less 10% of the aggregated adjusted bases of depreciable tangible assets used in trade or business to generate same income

3rd, multiply deemed intangible income by foreign percentage of deduction eligible income, to calculate FDII

Ø property sales (leasing or licensing) to non-U.S. persons for foreign use,Ø services provided to non-U.S. persons or with respect to foreign property

4th, apply deduction (37.5%) to FDII to calculate the balance that is taxable.Ø TY 2018-2025, deduction available equal to 37.5% of FDII (eff. tax rate of 13.125%)Ø TY beginning after 2025, deduction available equal to 21.875% of FDII (eff. tax rate 16.406%).

Ø Limitations with respect to related party transactions

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§ Prior law required a subpart F income inclusion for a 10% US shareholder

only if the foreign corp was a CFC for an uninterrupted period of 30 days or

more during the relevant tax year

§ Now subpart F income inclusion if the foreign corp is a CFC during "any

time" during the taxable year

§ Significant impact on planning for the transfer of wealth from NRA to US

persons on death of NRA

§ Planning involved "checking the box" on the foreign corporation on a

day after NRA's death resulting in no subpart F income inclusion

(because not a CFC for 30 days)

§ Dilemma under new law as CTB election effective after death results in

a portion of the built-in gains in CFC subject to sub-part F income

inclusion, and CTB election effective immediately prior to death

exposes US situs assets (e.g., US stock) to estate tax

§ Various planning options being discussed - no "one-size" fits all

approach

Repeal of "30 Day Rule" under §951(a)

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§ Basic private client structure under prior law

Revocable Trust

Foreign CorporationCorporation

US stock

&

Foreign Stock

Basis = $1M

FMV at Death = $10M

NRA

• During lifetime of Grantor, no U.S. income tax on U.S. capital

gain or portfolio interest. 30% flat tax on dividends.

• Upon death of NRA, no U.S. estate tax because foreign

corporation "blocks" application of U.S. estate tax

• Upon death of NRA, shares of the foreign corporation

automatically have cost basis adjusted to fair market value.

Typically referred to as a "step-up" in basis if shares have

appreciated in value.

• "Check-the-box" election is made for the foreign corporation.

This causes a deemed liquidation of the foreign corporation.

Foreign corporation is deemed to sell all of its assets and

then distribute them to shareholder in exchange for its own

stock.

• As long as check-the box election was made effective within

30 days of NRA's death, no Subpart F income would "pass

through" foreign corporation to the US beneficiary

shareholders

• The final result would be that the trust would be deemed to

directly own all portfolio assets with a cost basis equal to

their fair market value as of NRA's death. This eliminates all

built-in gain that accrued during lifetime of NRA without U.S.

beneficiaries being required to pay any U.S. income tax (or

the NRA's estate being required to pay U.S. estate tax upon

death).

Repeal of "30 Day Rule" under §951(a)

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§ 367 Changes

§ Repeal of active trade or business exception under §367(a)(3)

§ Old law permitted nonrecognition on outbound transfers where transferred assets were property used in an active trade or business

§ §367(d) expanded

§ "intangible asset" for §367(d) and §482 purposes includes goodwill, going concern value, workforce in place, and any other item of value or potential value that is not attributable to tangible property or the services of any individual

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Code Section 958(b)(4) Downward Attribution

Ø Section 958 sets forth rules for determining stock ownership of CFCs by US shareholders

Ø Subsection 958(a) addresses direct and indirect ownership through foreign entities

Ø Subsection 958(b) addresses constructive ownership, or attribution

Ø Specifically applies/modifies constructive ownership rules of Subchapter C (Section 318)

Ø (1) Prevents attribution between non-US and US family members

Ø (2) Treats partnerships, estates, trusts, corporations that own >50% of voting stock of a corporation as owning 100% of that corporation, for purposes of upward attribution to their respective partners, beneficiaries and shareholders

Ø (3) Reduces the threshold for upward attribution from a corporations to their 10% or greater value shareholders (instead of 50%)

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Code Section 958(b)(4) Downward Attribution

Ø Section 958 (b)(4) used to prevent downward attribution of foreign corporate stock from non-US persons to partnerships, estates, trusts, corporations, so as to treat a US person as the owner

Ø Rule was repealed effective for last tax year beginning before Jan. 1, 2018Ø Affects 2017 tax year for calendar year taxpayers

Ø Now foreign stock owned by non-US persons (e.g., individuals, parent corporations) can be attributed downward to their US subsidiaries or other US companies to treat affiliated foreign corporations as CFCs, with associated negative tax consequencesØ Disallowance of portfolio interest exemptionØ Subpart F income inclusions, if there are US shareholders who own the shares directly or through

foreign entities under 958(a), but not solely by the downward attribution

Ø Guidance released to avoid Form 5471 reporting (Notice 2018-13)

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Foreign SubU.S. Sub

Foreign Parent

CFC

Selected Inbound Changes

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Code Section 163(j) Interest Stripping Rules

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Ø Limitation on deduction of business interest, cannot exceed sum of:Ø (i) Business interest income,

Ø indebtedness allocable to a trade or business (not including investment interest)

Ø (ii) 30% of adjusted taxable income, and

Ø Does not include:

Ø Income not allocable to a trade or business (potentially favorable to avoid limitation)

Ø Net operating lossesØ Pass through deduction (new Code s. 199A)

Ø Depreciation, amortization (TYs beginning before Jan. 1, 2022)

Ø (iii) Floor plan financing interest (relating to acquisitions of motor vehicles for sale or lease)

Ø Carryover of disallowed interest to succeeding taxable year(s).

Code Section 163(j) Interest Stripping Rules

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Ø The term trade or business for purposes of 163(j) does not include:Ø Employee servicesØ Electing real property trade or business

Ø real property development, construction, acquisition, leasing, management, brokerageØ Requires affirmative (irrevocable election)Ø Must follow alternative depreciation system (straight line with longer recovery period), appl. to:

Ø commercial real propertyØ residential rental property, Ø qual. improvement property (int. improvements of commercial real property after placed in service)

Ø Electing farming businessØ Sale of electricity, water, sewage disposal services, gas or steam, pipeline transportation

Ø Only impacts taxpayers with greater than 25M in gross receiptsØ Limitation and tests applied at the partnership (or S corp) level

§864(c)(8) & §1446(f) - Sale of Partnership Interest by NRA

§ Codification of earlier holding of Revenue Ruling 91-32

§ Overturns recent Tax Court opinion in Grecian Magnesite

§ §864(c)(8): Gain or loss from sale of partnership interests by foreign person treated as ECI to extent partnership was engaged in a US trade or business

§ Effective for sales, exchanges, or other dispositions after 11/27/2017§ Hypothetical asset sale; any gain or loss from the hypothetical asset sale by

the partnership is allocated to interests in the partnership in the same manner as nonseparately stated income and loss

§ §1446(f): Transferee is required to deduct and withhold 10% of the amount realized on the sale or exchange unless the transferor certifies it is not a NRA or foreign corporation

§ Partnership must withhold if transferee fails to do so (with interest)§ Effective for dispositions after 12/31/2017

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Ethical Considerations

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Representing Clients with Undeclared Assets/Income in Foreign Jurisdictions

§ In determining competence, relevant factors include "whether it is feasible to refer the matter, or associate or consult with, a lawyer of established competence in the field in question." Fla. Rule 4-1.1, Comment

§ "Few American tax professionals are competent to address the foreign ...tax consequences that can arise when the U.S. client implements an estate plan that shifts the manner in which business or investment assets are held. "Donaldson, "A Hitchhiker's Guide to International Estate Planning: Estate Planning for United States Citizens with Assets Abroad and for Nonresidents with United States Assets," ACTEC J., Vol. 33, No. 4 (Spring 2008)

§ A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows or reasonably should know is criminal or fraudulent. However, a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning, or application of the law.” Fla. Rule 4-1.2(d)

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§ Pasquantino et al v. United States: Petitioners carried out a scheme to smuggle large quantities of liquor into Canada from the United States to evade Canada’s heavy alcohol import taxes

§ The federal wire fraud statute, 18 U.S.C. § 1343, prohibits “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses"

§ Held: A plot to defraud a foreign government of tax revenue violates the federal wire fraud statute because the Canadian government has a property right in collecting taxes and such activity took place within the US

§ Mail and wire fraud are predicate offenses for a money laundering violation. 18 U.S.C. sections 1956 and 1957

§ Bills have been proposed over the years to make tax evasion a separate money laundry offense

§ What should advisors do to protect themselves from aiding and abetting?

Representing Clients with Undeclared Assets/Income in Foreign Jurisdictions

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Questions?

Stewart L. Kasner, PartnerHolland & Knight LLP305.789.7684stewart.kasner@hklaw.com

Jennifer J. Wioncek, PartnerBilzin Sumberg305.350.7238jwioncek@bilzin.com

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