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November 1, 2019
Report on recent US international tax developments – 1 November 2019
On 31 October 2019, the United States (US) Treasury Department issued final regulations (TD 9880) under Internal Revenue Code (IRC)1 Section 385 removing the minimum documentation requirements that must be satisfied to treat certain financial arrangements among related parties as indebtedness for federal tax purposes. The final regulations adopt the proposed regulations (REG-130244-17) without any change.
At the same time, Treasury issued an advance notice of proposed rulemaking (REG-123112-19) that would modify the so-called Distribution Regulations, which may treat an issuance of a debt instrument in a distribution (or similar) transaction as stock. The Distribution Regulations include a funding rule that treats as stock a debt instrument that is issued as part of a series of transactions that achieves a similar result. The most noteworthy proposed modification would remove the funding rule’s per-se 72-month period for a more “facts and circumstances” test. The proposed regulations would treat the debt as stock only if its issuance has sufficient factual connection to a distribution to a member of the taxpayer’s expanded group or an economically similar transaction.
While determining that the Distribution Regulations remain necessary, Treasury intends that the proposed regulations make the regulations “more streamlined and targeted.” Treasury further intends the proposed regulations to apply to tax years beginning on or after the date of publication of adopting those rules as final regulations in the Federal Register.
The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of final and temporary foreign tax credit regulations on 29 October. The regulations, which had been listed as pending OIRA review since 3 October, were sent back to Treasury for final review and release. A senior Internal Revenue Service official earlier was quoted as saying the guidance would cover the apportionment of research and development expenses, as well as damage awards, settlement payments and the assignment of foreign taxes to income groups.
The Congressional Joint Committee on Taxation staff released the General Explanation of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19) on 31 October. Colloquially known as the Blue Book, the publication includes a description of all tax legislation enacted in the 115th Congress, with the exception of the 2017 Tax Cuts and Jobs Act (Public Law 115-97), which was covered in a separate General Explanation released in December 2018.
The IRS earlier this month released draft versions of the 2019 Form 1065, U.S. Return of Partnership Income, and its Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. The drafts reflect changes resulting from the Tax Cuts and Jobs Act (TCJA) and add certain new items to enhance reporting to the IRS and partners. The 2019 drafts are subject to revision before being finalized. Draft Instructions for the 2019 Form 1065 and Schedule K-1 were released this week.
The draft form has international relevance: Schedule B (Other Information) of the draft 2019 Form 1065 includes new line 27. It instructs partnerships to enter the number of foreign partners subject to Section 864(c)(8) as a result of (1) transferring all or a portion of an interest in the partnership, or (2) receiving a distribution from the partnership.
The United Kingdom (UK) did not crash out of the European Union (EU) on 31 October without a Brexit agreement, as many had feared. A Brexit extension was approved this week, with the UK’s Article 50 period (after which the UK will leave the EU) legally extended by the EU until 31 January 2020. The UK can leave earlier (on the first day of the month following deal ratification) if the Withdrawal Agreement Bill is passed in the UK Parliament.
The UK Parliament also voted this week for an early general election that is set for 12 December. The current UK Government hopes the election will “refresh” Parliament, by unlocking the ongoing deadlock and it is likely to make the election a vote on the parties’ respective positions on Brexit. The UK Parliament will be dissolved on 6 November, 25 working days before the election.
1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax and Transaction Services, Washington, DC