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Treasury and the IRS are leaning toward applying the changes to business interest deductibility made by the new tax law at the consolidated group level in forthcoming regulations, a department official said.
“We’ve been pretty forward-leaning that Section 163(j) should apply on a group basis,” said Brett York, an attorney-adviser in the Treasury Department’s Office of Tax Policy. “Nothing in the conference report contradicts this thinking,” and it makes the most sense from a policy perspective, he said Feb. 9 at the American Bar Association Section of Taxation’s midyear meeting in San Diego.
The 2017 tax law amends tax code Section 163(j) to limit the business interest deduction to 30 percent of a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years starting in 2018. Beginning in 2022, the deduction is limited to 30 percent of earnings before interest and taxes (EBIT).
The conference report specified that under the House’s version of the tax bill, the limitation applied—in the case of a consolidated group—at the consolidated tax return filing level. The conference report, however, didn’t clarify if that approach changed under the Senate or final versions of the legislation.
York’s comments provide assurance that regulations will likely maintain the House’s original thinking.
The Internal Revenue Service and Treasury are less sure of how to approach other changes made by the new tax law in the case of consolidated groups, according to York.
The new tax law includes a provision on foreign-derived intangible income (FDII) that creates an incentive for U.S. companies to sell goods and provide services to foreign customers. It does this by creating a special deduction on income that U.S. companies earn from foreign activities, resulting in a rate of about 13 percent on income that is deemed intangible and foreign, compared with the 21 percent corporate income tax rate.
Practitioners at the conference asked whether future guidance will provide a special rule with respect to sales within a U.S. consolidated tax group. York said the government is still considering how to apply FDII in the group context.
The law also created a new 10 percent base erosion and anti-abuse tax (BEAT). The tax generally applies to large multinationals—corporate taxpayers with three-year average annual gross receipts of $500 million—with a “base erosion percentage” of at least 3 percent.
Practitioners asked how the base erosion percentage is computed in the case of consolidated groups. York said Treasury and the IRS haven’t reached a final decision on this issue. “But I would just say, it would be an odd result if payments within consolidated groups could be used to modify the percentages so as to avoid the BEAT,” he said.
The government is also considering how the tax law provision that requires U.S. shareholders of controlled foreign corporations to pay tax on their global intangible low-taxed income (GILTI) will apply to consolidated groups, York said.
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