u.s. tax implications of global cash management

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limitedby guarantee, and forms part of the international BDO network of independent member firms.

U.S. TAX IMPLICATIONS OF GLOBAL CASH MANAGEMENT

April 30, 2020

2 U.S. Tax Implications of global cash management

JOE CALIANNOInternational Technical Tax

Practice Leader

[email protected]

SEAN DOKKOTax Managing Director

[email protected]

LAURIE DICKERTransfer Pricing Technical

Practice Leader

[email protected]

DANIEL NEWTONASC 740 Technical Practice Leader

[email protected]

With you today

This document is current as of April 24, 2020. This document is not written tax advice directed at the particular facts and circumstances of any person.This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


INTERNATIONAL TAX ISSUES RELATING TO REPATRIATION

4 U.S. Tax Implications of global cash managementU.S. Tax Implications of global cash management

Repatriation back to the United States

USP

CFC

Distribution

USP

CFC

Loan

USP

FDE

Transfer of cash or other

property


Characterization of the Distribution (General Rules) First, distribution of PTEP, then distribution of non-PTEP

• See §959(c) and Notice 2019-01 for further guidance and special rules Distributions in excess of E&P is §301(c)(2) return of basis Distribution in excess of basis is §301(c)(3) gain

CFC Distributions

USP

CFC

Distribution


PTEP Issues for Consideration Generally non-taxable if USP has sufficient basis in CFC stock

• Special rules for §1411 and, if §962 election is made, §962(d) for individual shareholders (not pictured)

CFC stock basis adjustments under §961(b) and gain recognition rule under §961(b)(2) if PTEP distribution > CFC stock basis

Ordering and other special rules in Notice 2019-01 and Reg. §1.960-3(c) Section 986(c) foreign currency exchange gain/loss

• Section 986(c) gain/loss scaled back for §965(a) PTEP distribution and no §986(c) gain/loss for §965(b) PTEP distribution

See Regs. §1.959-1(b) and §1.959-3 for rules and examples on distributions in the same year as the subpart F/GILTI inclusion

CFC Distributions

USP

CFC

Distribution


PTEP Issues for Consideration Suppose there is a mid-year distribution of PTEP that is associated with a current year subpart

F/GILTI inclusion under the §959 rules (assume the U.S. shareholder does not have any other PTEP in CFC). What is the timing of the basis adjustments under §961?• Timing of basis increase is relevant if taxpayer does not otherwise have sufficient basis in its

stock (without regard to a basis increase under §961(a) for current year subpart F/GILTI inclusion) so that distribution could result in gain recognition under §961(b)(2)

• Reg. §1.961-1(a) provides that basis is increased as of the last day in the taxable year of such corporation on which it is a CFC for current year inclusions under the CFC anti-deferral rules

• Reg. §1.961-2(a)(1) provides that basis is decreased as of the time such person receives such excluded amount

• The language of the 2006 proposed regs better coordinate income inclusions with basis adjustments to avoid mismatches. See Prop. Reg. §§ 1.961-1(b)(1), 1.961-2(a)(1), and 1.959-3(e)(2)― Notice 2019-01 proposes to withdraw the 2006 proposed regs and issue new regs under §§

959 and 961• See also gain reduction rule of Reg. §1.965-2(g)• What is the result if mid-year distribution occurs today?

CFC Distributions

USP

CFC

Distribution


PTEP Issues for Consideration Withholding taxes and potential increase in FTC limitation under §960(c)

• Scale back of FTCs for foreign taxes on §965 PTEP distributions

CFC Distributions

USP

CFC

Distribution


NON-PTEP Distribution Issues for Consideration Generally included in gross income Section 245A DRD for certain corporate shareholders?

• No FTCs or deductions for foreign taxes paid/accrued on exempt dividends under §245A(d)

• See rules and limitations in Reg. §1.245A(e)-1 and §1.245A-5T• Holding period and other requirements in Section 246• Special rules in §1059 (rules dealing with extraordinary dividends)• Consider rules in §961(d) if subsequent sale of CFC stock (rules

determining foreign corporation stock basis for purposes of determining a loss)

Section 1(h)(11) for an individual shareholder (not pictured)?

CFC Distributions

USP

CFC

Distribution


Section 301(c)(2) Return of Basis Issues for Consideration Generally nontaxable Confirm basis in CFC stock or blocks of stock

Section 301(c)(3) Gain Issues for Consideration Generally included in gross income Gain recharacterized as a §1248 dividend for CFC2’s untaxed E&P under

§1248(c)(2)?• Section 245A DRD on §1248 dividend for certain corporate shareholders?• Section 1(h)(11) for individual shareholders (not pictured) on §1248

dividend? ― Special rules limiting tax payable for individuals on §1248 dividend

under §1248(b) Other collateral implications?

CFC Distributions

USP

CFC

Distribution

CFC2


Tiered Distribution Issues for Consideration What is the characterization of the distribution (PTEP, non-PTEP,

ROB, §301(c)(3))? Section 960(b)(2) FTC rules for PTEP distribution from CFC2 to CFC1 Any CFC anti-deferral rule implications on distribution received by

CFC1? If §301(c)(3) gain recognized by CFC1 is recharacterized as a dividend

because of untaxed E&P of CFC2’s subs (not pictured), consider §964(e) and §245A

Section 961(c) basis adjustments for CFC2 stock

CFC Distributions through tiers of CFCs

USP

CFC1

Distribution

CFC2

Distribution


CFC Loan Issues for Consideration Possible §956 income inclusion to U.S. shareholder

• PTEP can shelter §956 income inclusion under §959(a)(2) and §959(f)• Certain corporate shareholders may claim a reduction in §956

inclusion if certain requirements satisfied (i.e., can claim §245A DRD with respect to dividends from CFC)

• No FTCs for §956 inclusion under Reg. §1.960-2(b)(1)• Similar issues to consider if a U.S. shareholder does not pay down

trade payables due to its CFC in a timely manner or has a CFC directly or indirectly guarantee a third-party loan

Terms of the loan (e.g., maturity date, interest rate, currency, etc.)

CFC Loans

USP

CFC

Loan


CFC Loan Issues for Consideration Tax implications on interest paid to CFC

• Possible subpart F income to CFC― Section 267(a)(3)(B) for accrued but unpaid interest

• Section 163(j) limitation to USP• Withholding on interest paid? Treaty benefits for CFC?• BEAT issues if USP is an applicable taxpayer and CFC is entitled to

treaty benefits?― Consider waiving deductions under proposed §1.59A-3(c)(6)

CFC Loans

USP

CFC

Loan


FDE Transfer Issues for Consideration Section 987 gain/loss on remittance if FDE activities are a §987

QBU Withholding taxes and FTC basketing rules

Foreign Branch/FDE Transfers to U.S. Owner

USP

FDE

Transfer of cash or other property


IMPACT OF LOSSES ON THE CFC ANTI-DEFERRAL RULES


CFC Losses and Anti-deferral Issues for Consideration Subpart F income

• Section 952(c)(1)(A) current year E&P limitation― Subject to recapture rules in §952(c)(2)

• To the extent losses generate a deficit in E&P, possible future use of such deficit in certain situations:― Qualified deficit rule in §952(c)(1)(B) for certain prior year CFC E&P

deficits• Chain deficit rule in §952(c)(1)(C)

CFC Losses and Anti-deferral Rules

USP

CFC1

CFC2(CFC2 Loss)


CFC Losses and Anti-deferral Issues for Consideration GILTI

• A CFC’s tested loss can potentially reduce USP’s GILTI inclusion― Tested loss of a tested loss CFC can reduce tested income of a tested

income CFC for purposes of calculating net CFC tested income― No QBAI and no §960(d) FTCs for tested loss CFCs

• To the extent tested loss of a tested loss CFC reduces tested income of a tested income CFC, reduced FTCs for tested income CFC

Coordination rules for subpart F and GILTI including rules coordinating 952(c) and §951A (e.g., Reg. §1.951A-2(c)(4)(iii)(A) and (B))

CFC Losses and Anti-deferral Rules

USP

CFC1

CFC2(CFC2 Loss)


CFC Loss Issues for Consideration What if CFC is insolvent?

• CTB election for CFC? ― Rev. Rul. 2003-125 provides that a deemed liquidation by reason

of a CTB election is an identifiable event that fixes the loss withrespect to the stock

• No Section 332 liquidation • Worthless stock loss--ordinary loss under §165(g)(3)?

Structuring out of §§ 332/337 into a taxable liquidation if built in loss in CFC stock but CFC not otherwise insolvent?• Granite Trust transaction

Intercompany loan due from CFC to USP?• Bad debt deduction?

CFC Losses

USP

CFC(CFC Loss)


NOL CARRYBACK PROVISIONS UNDER THE CARES ACT INTERNATIONAL TAX IMPLICATIONS


General Rules The CARES Act provides for a carryback of NOLs generated in tax years beginning after December 31, 2017,

and before January 1, 2021 to the five tax years preceding the tax year of such loss May elect not to carryback an NOL

International Tax Issues for Consideration Taxable income limitation in §250 and impact of §250 deduction Impact on claiming FTCs, including the impact such carryback may have on SLLs, OFLs, and ODLs Deemed §965(n) election if carried back to a §965 year

• Can elect to exclude §965 year(s) from the carryback period (see Rev. Proc. 2020-24 for additional guidance)

BEAT implications for applicable taxpayers

NOL Carryback – International Tax Issues


International Tax Issues for Consideration IRS released FAQs about carrybacks of NOLs for taxpayers who have had §965 inclusions

• www.irs.gov/newsroom/frequently-asked-questions-about-carrybacks-of-nols-for-taxpayers-who-have-had-section-965-inclusions

• FAQ4 confirms a refund will be generated only if the credit generated by the NOL carryback to the §965 year exceeds the entire unpaid income tax liability, including the unpaid installments under §965(h), for the §965 year

• FAQ10 confirms that collateral consequences (e.g., FTC carryforward) can apply to a §965 year even if a taxpayer elects to exclude the §965 year from the carryback period

Rev. Proc. 2020-24 provides guidance regarding elections related to NOL carryback provisions including election to waive carryback, election to exclude §965 year from carryback and the deemed §965(n) election


https://www.irs.gov/newsroom/frequently-asked-questions-about-carrybacks-of-nols-for-taxpayers-who-have-had-section-965-inclusions



Rev. Rul. 2020-08 Treasury suspends Rev. Rul. 71-533 and part of Rev. Rul. 68-150

pending reconsideration of whether the three-year limitations period provided by §6511(d)(2)(A) should apply rather than the 10-year limitations period provided by §6511(d)(3)(A) to claims for refund or credit of an overpayment resulting from a FTC carryback arising as a result of a NOL carryback from a subsequent year• Applying §6511(d)(2)(A) instead of §6511(d)(3)(A) may provide a

shorter limitations period in certain situations Prospective guidance – suspension will not apply adversely to

taxpayers that filed or files a claim consistent with Rev. Rul. 71-533 and Rev. Rul. 68-150


TRANSFER PRICING CONSIDERATIONS


Transfer Pricing Considerations

Cash Repatriation Losses NOL Carrybacks

International TaxTransfer Pricing



CASH

Local Transfer Pricing

Constraints

RepatriationNeeds


Transfer Pricing ConsiderationsIt’s Not Just a Tax Thing

Input from Trade & Customs, Finance, Purchasing, Marketing, R&D etc.

Up-to-date financial forecasts Supply chain disruptions (forced closures, materials shortages,

reduced demand, reroutes)


Limited Risk v. No Risk Adjust profit target within the arm’s length range? Outside the range? Loss sharing? What does the contract say? What is happening in the market? Short-term v. Long-term

• i.e., lower profit now, higher profit later? History

Transfer Pricing Considerations Limited Risk Distributors & Contract Manufacturers


Management Fees & Royalties Levels & types of I/C services may have changed

significantly; may need to recalibrate I/C fee structures

Royalty base may have shrunk Royalty rate adjustments IP value may have changed


Payments to service providers and IP owners fall

Need to incorporate into cash forecasts


Financial Issues & Transactions Existing intra-group agreements (loans, guarantees) Inventory buy-back Accelerate / decelerate I/C payment terms Royalty advances Intercompany loans Extraordinary expenses (managing v bearing) 2020 OECD guidance



NOL Carryback Closed tax year(s) now open Is transfer pricing documentation in place?



Documentation Document NOW Unique circumstances – standard documentation may not be sufficient Market / third party evidence Tailored industry analysis Specific functional & risk analysis Revisit comparables (loss companies, adjustments) Consistency in global documentation IRS FAQ on Transfer Pricing Documentation Short memory – ours & tax authorities’



ASC 740 CONSIDERATIONS


The adjustment should be included in income from Continuing Operations in the interim period that includes the enactment date

CARES Act was enacted on Friday, March 27, 2020 making this a Q1 event for calendar year companies Numerous Non-US jurisdictions are also enacting and proposing measures to deal with the COVID-19 pandemic

• Many Non-US jurisdictions are introducing measures that impact income taxes and non-income based taxes• ASC 740 deals with income taxes so careful attention needs to be paid to the various measures enacted and

proposed outside the US to ensure proper accounting for US GAAP purposes

See BDO COVID-19 and CARES Act Insight on BDO.com

ASC 740 ImplicationsChanges in Tax Law

ASC 740 requires an entity to adjust current and deferred tax assets and liabilities for the effects of changes in tax laws or rates

https://www.bdo.com/insights/tax/federal-tax/asc-740-income-taxes-implications-of-covid-19


Cash Repatriation

Change in assertion regarding unremitted foreign earnings and other outside-basis differences Record tax effect of the change in the “period” in which the change in assertion is made Tax effect of change related to earnings at the beginning-of-the-year should be recorded as a discrete item Tax effect of current year activity should be part of the annual effective tax rate calculation Not an all-or-nothing assertion Potential taxes – SALT, foreign withholding taxes, and potential local country taxes

ASC 740 Implications


Transfer Pricing

Two sides to every transaction Tax authorities with conflicting interest – income in one jurisdiction while deduction in a different

jurisdiction Potential exposure in either or both jurisdictions Tax treaties may provide for competent authority negotiations Determine exposure in each jurisdiction before potential CA relief Determine whether CA relief will be pursued and assess success probability Determine potential settlement positions and record exposure and potential CA benefit



NOL Carrybacks

The impacts of tax law changes are recorded to continuing operations Companies should consider the impact of this provision on valuation allowance assessments in light of this additional

source of income. Consideration should be given to the impact on interim tax provisions, specifically whether the impacts should be

recorded discretely or part of the annual effective tax rate. Balance sheet reclasses between current and deferred taxes may be appropriate due to the carryback of losses Consideration should be given to recognition of the tax benefit for the difference between the 35% tax rate applicable

to certain periods to which losses can be carried and the current rate of 21%, along with the expected complexities involved with the interplay with pre-TCJA tax law

Assessment of management’s position with respect to certain elections available for this provision should be made



ASC 740 ImplicationsAMT Credits/Section 163(j)

AMT Credits Balance sheet reclasses between current receivable and non-current

receivable/deferred taxes should be considered

Section 163(j) The impacts of tax law changes are

recorded to continuing operations Companies should consider the

impact of this provision on valuation allowance assessments for non-deductible interest

Consider whether the impact of this change should be recorded as discrete or as part of the annual effective tax rate

Balance sheet reclasses between current and deferred taxes should be considered.

Assessment of management’s position with respect to certain elections available for this provision should be made


Taxpayers who have small business loan debt forgiven under Sec. 1106 of this Act are able to defer up until the loan is forgiven

Delay Of Payment Of Employer Payroll Taxes

Allows deferral of payment of the

employer portion of Social Security tax (6.2%) that would

otherwise be due and payable through

December 31, 2020

Self-employed individuals would

be eligible to defer 50% of self-

employment Social Security tax payments

50% of the deferred amount paid on or before December

31, 2021, with remaining amount paid on or before

December 31, 2022


Delay Of Payment Of Employer Payroll Taxes

If companies are looking to increase NOLs for carryback purposes, consider accelerating payment

To the extent payroll taxes are deferred and not currently deductible under, a deferred tax asset would need to be established for the future deductions

Any deferred tax asset established would need to be included as part of the overall valuation allowance assessment

Payroll taxes are generally deductible in the tax year the underlying compensation is considered fixed and determinable and paid within 8 ½ months under the recurring item exception

CARES ACT

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u.s. tax implications of global cash management

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