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Report on recent US international tax developments – 15 June 2018

US House Ways and Means Committee Chairman Kevin Brady this week said he wants to release a “phase 2” tax reform bill before the summer recess. Chairman Brady was quoted as saying that Republican-led action on a second tax reform bill, which is being coupled with certain health-care related tax proposals, has picked up steam, although he declined to offer any specifics. Ongoing discussions reportedly are centered on what will be included in the tax bill, although the centerpiece appears to be making the individual income tax provisions in the Tax Cuts and Jobs Act (TCJA) permanent. Other areas floated for consideration in a phase 2 tax reform bill include retirement savings, the treatment of capital gains and employer incentives.

It is unclear if a tax technical corrections bill to the TCJA would be included in a second tax reform bill, or attached to some must-pass legislation.

The Internal Revenue Service (IRS or Service) issued Notice 2018-57 on 13 June, announcing the Government’s plan to delay application of the Internal Revenue Code1 Section 987 foreign currency regulations and certain corresponding provisions for an additional year. More specifically, the notice stated that the IRS intends to amend the final regulations under Section 987 and certain related provisions of the temporary regulations under that section, to delay the applicability date of those regulations by one additional year. The IRS previously had delayed the application of the Section 987 regulations by one year in Notice 2017-57, after the regulations were identified in Notice 2017-38 (along with seven other regulations) as significant tax regulations requiring additional review under Executive Order 13789.

This means that the final Section 987 regulations now apply to tax years beginning on or after three years after the first date of the first tax year following 7 December 2016 (i.e., 1 January 2020, for in-scope calendar-year taxpayers). No changes were made to the provisions relating to the applicability dates of the deferral of Section 987 gain or loss and the temporary Section 988 regulations.

The Government also indicated, as it did in Notice 2017-57, that it is considering changes that would allow taxpayers to elect to apply alternative rules for transitioning to the final Section 987 regulations and alternative rules for determining Section 987 gain or loss. Notice 2018-57, however, does not provide any further details on those planned alternative rules. Taxpayers may rely on the provisions of Notice 2018-57 before amendments to the final Section 987 regulations and the related temporary Section 987 regulations are issued.

An IRS official this week was quoted as saying the Service will give US withholding agents 60 days following the issuance of an information document request to cure accounts, for the post-cure amount to be included before withholding liabilities are extrapolated from statistical samples of accounts.

The same official also addressed the IRS Large Business and International Division’s campaign targeting refunds related to Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. The official disclosed that the audits will be limited in scope and will be aimed at verifying withholding credits to substantiate claims. The IRS will not be reviewing whether withholding agents made sufficient deposits, she said.

And the IRS is close to finalizing the 2016 proposed Foreign Account Tax Compliance Act regulations that outline the requirements that a “sponsor” of a foreign financial institution (FFI) must meet to assume responsibility for performing due diligence on the FFI’s behalf. An IRS official was quoted as saying that while the final rules will generally contain few changes compared to the proposed regulations, they will take into account taxpayer comments and industry practices, and will address reporting requirements of sponsoring entities of financial institutions in certain Model 1 jurisdictions.

The official also said the Service will issue two sets of guidance on the new Section 1446(f) 10% withholding tax. The guidance will be separated into Section 864(c) issues and those related to publicly traded partnerships. Section 1446(f), enacted by the TCJA, requires the purchaser of a partnership interest to withhold 10% of the amount realized on the sale or exchange of the partnership interest, unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation.

Endnotes

1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

EYG no. 03644-181Gbl

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