us tax updates implications for multinational … · 2020. 11. 10. · goods/pp $1200 inventory...

US TAX UPDATES – IMPLICATIONS FOR MULTINATIONAL CORPORATIONS

HIGHLIGHTS AND ANALYSIS

Ravi YadavarCFO

Zydus USA

Pooja PahadeAVP – Taxation

Startek Inc.

Shishir LaguPartner - US Tax

KNAV

Kavit SanghviSenior Manager- US Tax

KNAV

Ameya ManmadkarAssociate - US Tax

KNAV

Canada | India | Netherlands | Singapore | UK | USA

CONTENTS

▪ Introduction

▪ GILTI High Tax Exception

▪ IRC Section 163(j) - Final Regulations

▪ IRC Section 263A Capitalization Rules

▪ Other Updates

▪ IRS Audit Experience – International Transactions

▪ Updates On The CARES Act

▪ Q&A

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INTRODUCTION

The first half of 2020 was full of various reliefmeasures such as the CARES Act, intending to upliftthe US economy in response to the economic crisisstemming from the coronavirus pandemic.

The second half of 2020 has also brought aboutsome important US tax updates especially from theperspective of multinational corporations carryingout their business in multiple foreign jurisdictions.We shall cover such updates as a part of thiswebinar.

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GILTI HIGH TAX EXCEPTION (HTE)

Observations

In multiple instances, US corporations were losing out on their US domestic losses on account of positive GILTI inclusions (i.e., CFCs with net profits). These corporations did not have any US tax liability due to the availability of foreign tax credit (FTC). Exclusion of certain CFCs with positive GILTI inclusions might assist the US corporations in preserving their US domestic losses.

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Existing Provisions Tax Update

Post the Tax Cuts and Jobs Act (TCJA), a US corporation owning a Controlled Foreign Corporation (CFC) was required to include the income (computed based on the GILTI provisions) of such CFC in its taxable income on its annual US tax return.

The final GILTI HTE regulations permit the exclusionof certain CFCs from the GILTI calculation of a US corporation upon satisfaction of certain requirements.



Key Provisions:

▪ A CFC is eligible for the GILTI HTE if its Effective Tax Rate (ETR) is above 18.9% which is 90% of the US corporate tax rate of 21%.

▪ ETR = (Tax paid in the foreign jurisdiction) / (Taxable income of CFC as per US tax principles).

▪ Election to be made on an annual basis.

▪ Retrospective Election – Possibility of amending the 2018 and 2019 tax returns.

▪ The election is to be made on the CFC group level.

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Illustration depicting potential benefit

Key Observations:

▪ US domestic losses of $50,000 have been preserved.

▪ Potential cash benefit - $50,000 X 21% = $10,500.

▪ These losses can be carried back too.

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Particulars 2019

US Domestic Loss $100,000

UK GILTI Inclusion $50,000

UK ETR 17%

India GILTI Inclusion $200,000

India ETR 25%

Facts

Pre-HTE Post-HTE

Particulars 2019 2019

US Domestic Loss ($100,000) ($100,000)

GILTI Inclusion $250,000 $50,000

US Taxable Income (A) $150,000 ($50,000)

Tax Rate (B) 21% 21%

Tax Payable (A) * (B) $31,500 NIL

Foreign Tax Credit ($31,500) NIL

Tax Outflow NIL NIL

Tax Calculation


IRC SECTION 163(J) – FINAL REGULATIONS

Observations

Allowance of COGS depreciation in computing the ATI will increase the value of ATI. This will permit taxpayerswith capital intensive businesses such as manufactures to claim a higher interest expense deduction.

The exclusion of debt issuance cost from the definition of interest expense will lead to such cost beingexcluded from the purview of the IRC section 163(j) limitation. Hence, this expense can be claimed as adeduction without any restriction.

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1) Only Non - Cost of Goods Sold (COGS) depreciation is allowed as an addback for computing Adjusted Taxable Income (ATI).

2) Debt issuance cost is a part of interest expense

1) Cost of Goods Sold (COGS) depreciation is allowed as an addback for computing Adjusted Taxable Income (ATI).

2) Debt issuance cost is not a part of interest expense



Key Provisions:

▪ The CARES Act increase the ATI limit from 30% to 50%. The final regulations confirm this.

▪ Calculations for CFCs can be made on a CFC group level if the CFC group election is made.

▪ Anti-abuse rules relating to expenses economically equivalent to interest expenses.

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Key Observations:

▪ The total allowable deductions post final regulations have increased by $45,000 [($100,000 + $50,000) –($105,000)]

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Particulars 2019

US Taxable Income $100,000

Depreciation (Non COGS) $100,000

Depreciation (COGS) $100,000

Interest Expense $100,000

Debt Issuance Cost $50,000

Pre-Final Post-Final

Particulars 2019 2019

US Taxable Income $100,000 $100,000

Depreciation $100,000 $200,000

Interest Expense $150,000 $100,000

Adjusted Taxable Income $350,000 $400,000

ATI Limit ( 30% / 50% ) $105,000 $200,000

Interest Expense (CY) $150,000 $100,000

Allowable Interest Expense Deduction (including debt issuance cost)

$105,000 $150,000

Amount Disallowed $45,000 NIL

Facts

Tax Calculation


IRC SECTION 263A CAPITALIZATION RULES

Observations

The MSPM method utilizes a separate pre-production and production absorption ratio for calculating the costrequired to be capitalized under IRC section 263A. This will generally result in reduced IRC section 263Acapitalization and will correspondingly increase the allowable deductions for taxpayers (especially taxpayersinvolved in manufacturing).

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The 263A calculations were required to be done as per the Simplified Production Method (SPM)

The 263A calculations are required to be done as per the Simplified Production Method (SPM) or Modified Simplified Production Method (MSPM)



Key Provisions:

▪ Calculation of capitalized value under MSPM -

Pre-production (PP) cost capitalized = [PP additional 263A cost/PP 471 cost] X PP 471 cost in ending inventory

Production (PR) cost capitalized = [(PR additional 263A cost + PP 263A cost not capitalized) / (PR 471 cost +

Direct material adjustment) ] X PR 471 cost in ending inventory

▪ The documentation requirement upon using the SPM has been made more stringent.

▪ Specific guidance pertaining to permissible negative adjustments has been provided. Negative adjustmentsare only permitted under MSPM, SPM (average annual gross receipts for previous 3 years




Key Observations:

▪ The total capitalized value under SPM is $82.50.

▪ The total capitalized value under MSPM is $50 ($30 + $20).

▪ Hence, the taxpayer can reduce the capitalization and in turn claim an excess deduction of $32.50 with the use of MSPM.

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Particulars 2019

263A Cost – PP (A) $20

263A Cost – PR (B) $90

471 Cost – PP (C) $1200

471 Cost – PR (D) $800

Inventory – RM & Resale Goods/PP

$1200

Inventory – FG&WIP/PR $300

Facts

Particulars 2019

Inventory Value $1500

SPM Absorption Rate 5.5%

263A Capitalised Value $82.50

SPM Calculation

Particulars 2019

COGS Negative Adjustment (E) $10

SPM Absorption Rate [(A)+(B)]/[(C)+(D)] 5.5%

MSPM Absorption Rate – PP (A)/(C) 1.67%

MSPM Absorption Rate – PR [(B)-(E)]/(D) 10%

Particulars 2019

Inventory Value – PP $1200

MSPM Absorption Rate – PP 1.67%

263A Capitalised Value – PP $20

Inventory Value – PR $300

MSPM Absorption Rate – PR 10%

263A Capitalised Value – PR $30

MSPM Calculation


OTHER UPDATES

Foreign Tax Credit – Final Regulations and 2020 Proposed Regulations ▪ Allocation and apportionment of foreign taxes and other deductions to gross income in accordance with IRC

section 861. ▪ Disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a

dividends-received deduction.▪ Timing of claiming foreign income tax as a credit.

II) Foreign Derived Intangible Income – Final Regulations▪ Increase in the flexibility of the documentation rules.▪ Notable Revisions to the ordering rules for deduction for FDII and GILTI▪ Notable revisions to computation of FDII such as expense allocation, foreign branch income for FDII

purposes▪ Changes in the foreign sales of general property and foreign sales of intangible property definitions▪ Modifications in manufacturing exceptions▪ More clarity on the related party transactionsIII) Meals and Entertainment▪ Clarifications regarding entertainment expenses and related disallowance.▪ Clarifications regarding the definition of the term “food and beverage expenses”.

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UPDATES ON THE CARES ACT

Some other measures that were enacted as a part of the CARES Act include deferral of social security tax payment, removal of limitation on the used of net operating losses, advancing the refund of MAT credit, employee retention credit etc.

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CARES Act Provision Update

Carry Back of Losses ❑ The CARES Act permitted taxpayers to carry back losses up to 5 years. The losses generated in tax years 2018, 2019 and 2020 were eligible for the same. The IRS also provided the taxpayers with the ability to fax their refund claims to ensure fast processing.

❑ The IRS has released various FAQs and updates in this regard but most of them have been clarificatory in nature and the general requirements for carry back remain the same.

Paycheck Protection Program (PPP)

❑ PPP loans authorized by the CARES Act may be forgivable, in whole or in part, provided that the taxpayers use the proceeds for qualifying expenses. However, there has been much debate regarding the deductibility of qualifying expenses paid using PPP loans that have been forgiven.

❑ Notice 2020-32 issued by the IRS clarified that taxpayers whose PPP loans are forgiven cannot deduct the business expenses for which they used the forgiven loan proceeds. However, the Senate Bill 3612 sought to reverse this clarification. This bill has not yet been passed in the senate.

❑ Change in ownership rules – As per the clarifications received, the PPP lender will have to be notified of any change in ownership that is more than 20%. Also, SBA consent will be necessary for any 50% or higher change in ownership. Even post the ownership change, the PPP borrower or an eligible successor will remain subject to all obligations under the PPP loan.


IRS AUDIT EXPERIENCE – INTERNATIONAL TRANSACTIONS

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International Transactions

Transfer Pricing

GILTI

Inter-Company

Debt

IRC Section 965

Q&A

Ravi YadavarCFO

Zydus [email protected]

Pooja PahadeAVP – Taxation

Startek [email protected]

Shishir LaguPartner - US Tax

[email protected]

Kavit SanghviSenior Manager- US Tax

[email protected]

Ameya ManmadkarAssociate - US Tax

[email protected]

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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USA OFFICE

Canada55 York Street, Suite 401, Toronto, ON M5J 1R7, Canada

IndiaMumbai 201/202, Naman Centre, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai – 400 051T: +91 22 6164 4800

PuneA 401, Lotus Siddhi, Survey no. 162, D.P. Road, Aundh, Pune – 411007

NetherlandsFokkerstraat 12, 3833 LD Leusden, The Netherlands

Singapore60 Paya Lebar Road,#10-31 Paya Lebar Square, Singapore 409 051

UKGround floor, Hygeia Building, 66-68 College Road, Harrow, Middlesex HA1 1BE


OTHER OFFICES

AtlantaOne Lakeside Commons, Suite 850, 990 Hammond Drive NE, Atlanta, GA 30328T: +1 678 584 1200

New York1177 6th Ave 5th Floor, New York, NY 10036, USA

For assistance, please contact [email protected] or visit us at: www.knavcpa.com

us tax updates implications for multinational … · 2020. 11. 10. · goods/pp $1200 inventory...

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