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Multinational companies could be rethinking some plans for foreign restructuring after Congress moved to treat certain types of overseas corporate value as intangibles under the new tax law, practitioners told Bloomberg Tax.
That corporate value—known as “foreign goodwill” and “going concern"—is the residual value of a company after all other pieces of the business have been valued.
Defining foreign goodwill and going concern as intangibles means their transfer could result in significant taxes under tax code Section 367(d).
Robert J. Kovacev, a tax partner with Steptoe & Johnson LLP, said because of this cost, multinationals may “think twice about how they restructure or reorganize their foreign operations. They may find that their current structures are frozen in place.”
He described a situation where a multinational wants to change a foreign branch into a foreign corporation—known as “unchecking the box” identifying an entity’s classification. That process is now more expensive because the transfer of foreign goodwill and going concern would result in more taxes, Kovacev said.
Dentons partner John Harrington, who chairs the Bloomberg Tax International Advisory Board, explained that transfers of intangibles lead to taxes because when the multinational corporation does the transfer, it is treated as licensing the intangible whether it wants to or not.
That, in turn, means the multinational company will earn “deemed royalties” subject to tax. If the value of the intangible increases, so does the royalty—and the tax.
Because the license is treated as having taken place over the life of the intangible, those taxable royalties could keep going for many years, Harrington said.
Defining the concepts isn’t easy. Essentially, goodwill and going concern are the value of a business that’s left over after all of its easy-to-identify assets—both tangible and intangible—have been valued.
To illustrate, Harrington described a company that has furniture worth $10, equipment worth $20, a $40 building, and a customer list worth $10—for a total of $80. However, the overall value of the business is $100.
Harrington said the $20 difference, which could just stem from the idea that “you’ve got a going business,” is the foreign goodwill and going concern. For example, he said, that extra $20 in value could come from a trade name.
Some practitioners said the 2017 tax act ( Pub. L. No. 115-97) closes the door on an Internal Revenue Service debate that has been raging for years about the treatment of the residual value of foreign companies.
IRS regulations on potentially abusive outbound transfers of intangibles under tax code Section 367(d) originally contained an exception for foreign goodwill and going concern.
In late 2016, at the end of the Obama administration, officials yanked the exception altogether.
Several months later, as part of a tax regulation review mandated by President Donald Trump in mid-2017, the Treasury Department said it would consider reinstating a tailored exception.
As late as Nov. 8, 2017, Treasury international taxation adviser Brenda Zent said the government was looking at taxpayers that had a “previous boots on the ground” foreign business in crafting a “limited exception” to the Section 367 rules.
Zent told the American Institute of CPAs that Treasury would look at whether the business is being done in “a true foreign branch conducted offshore for a significant period of time.”
But the time for Treasury to act may be past.
Some practitioners said when Congress defined goodwill and going concern as intangibles, that took away the IRS’s ability to do anything more through regulations.
Kovacev said the law spells “game over” for the ability of companies to transfer that leftover value tax-free.
Joe Calianno, a tax partner with BDO USA LLP, said there may still be a tiny glimmer of hope that the IRS could do something, but acknowledged he isn’t optimistic. “It’s looking far less likely,” he said. “I wouldn’t count on it.”
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