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July 31, 2020
Report on recent US international tax developments – 31 July 2020
The United States (US) Treasury and the Internal Revenue Service (IRS) on 28 July released final regulations (TD 9905) and proposed regulations (REG-107911-18) on the business interest expense limitation under Internal Revenue Code1 Section 163(j) (the Section 163(j) Limitation). The Section 163(j) Limitation was modified in December 2017 by the Tax Cuts and Jobs Act (TCJA), and in March 2020 by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
At the same time, the IRS issued Notice 2020-59, which creates a safe harbor allowing taxpayers that manage or operate qualified residential living facilities to be treated as a real property trade or business solely for purposes of qualifying as an electing real property trade or business. The Government also released FAQs on the aggregation rules that apply for purposes of the gross receipts test and determining whether a taxpayer is a small business exempt from the Section 163(j) deduction.
The eagerly-anticipated final regulations provide guidance on:
There are significant changes in the final regulations, as compared to the former proposed regulations, including:
The final regulations apply to the first tax year beginning 60 days after the final regulations are published in the Federal Register (i.e., 1 January 2021, for calendar-year taxpayers). An anti-avoidance rule applies to transactions entered on or after the date the final regulations are published in the Federal Register. Taxpayers may apply the final regulations to tax years beginning after 31 December 2017, so long as they consistently apply all of the final regulations.
The Section 163(j) proposed regulations:
The proposed regulations generally are not retroactive, though taxpayers may choose to apply them to tax years beginning after 31 December 2017.
The IRS will provide compliance resources to address taxpayers’ stock-based compensation in cost-sharing arrangements, according to IRS Large Business & International (LB&I) Division Commissioner Douglas O’Donnell. The action is being taken following the US Supreme Court’s recent denial of the petition for writ of certiorari in Altera Corporation & Subsidiaries v. Commissioner. The Commissioner was quoted this week as saying that LB&I would use its centralized transfer pricing risk assessment approach to identify and examine taxpayers that are found to have improperly reported their stock-based compensation expenses. The Commissioner added that LB&I would be working with the Office of the IRS Associate Chief Counsel (international) to “determine whether there’s a need for additional guidance with respect to a number of specific technical aspects that we realize are out there.”
Altera had filed the petition asking the Supreme Court to review a decision of the Ninth Circuit Court of Appeals upholding the 2003 version of Reg. Section 1.482-7, which requires participants to include stock-based compensation costs in a cost-sharing arrangement. The LB&I Commissioner acknowledged that Altera only applies within the jurisdiction of the Ninth Circuit but said “we do think it will help us generally in our cost-sharing cases and at Appeals,” and if the IRS litigates in the future.
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