2020 Year-End Tax Guide

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FOREIGN-DERIVED INTANGIBLE INCOME (“FDII”) Also introduced under the TCJA, section 250 allows a U.S. C-Corporation that provides services and makes sales to foreign customers located outside of the U.S. the ability to take a deduction on foreign-derived intangible income (“FDII”). The FDII deduction, which was intended to encourage C-Corporations to export goods and services outside of the U.S., essentially reduces the effective tax rate imposed on qualifying income to 13.125% of the normal federal statutory rate of 21%. However, in order to take advantage of the FDII provision, taxpayers were previously required to comply with stringent documentation rules to establish that their foreign- sourced income was eligible for the FDII deduction. Heeding taxpayer complaints that its previous documentation requirements were unduly burdensome, the IRS released final regulations in 2020 that significantly relaxed the documentation rules such that specific documentation was no longer required for most forms of transactions. Instead, the final regulations grant taxpayers more flexibility in the means by which they substantiate that their services or sales transactions are: (1) to foreign persons and (2) are going to be consumed abroad. Because the applicability provisions of the 2020 final regulations clarify that taxpayers may choose to adopt them for tax years beginning on or after January 1, 2018, companies that previously could not take advantage of the FDII deduction due to the strict documentation rules required under the proposed regulations should consider filing amended returns adopting the final regulations, so that they can benefit from its comparatively less-stringent evidential standards. BASE EROSION AND ANTI-ABUSE TAX (“BEAT”) - FINAL REGULATIONS On December 22, 2017, the TCJA codified IRC section 59A (i.e., the base erosion and anti-abuse tax), which applied a tax on large (i.e., $500 million or more average gross revenue over the last 3 years) multinational corporations that shift profits abroad through related party transactions that create U.S. deductible payments to low-tax foreign countries. On September 1, 2020, the IRS issued final regulations under section 59A, which provided clarity, flexibility and guidance on the application of BEAT.

OTHER NOTABLE PROVISIONS 2020 also brought forth final and proposed regulations regarding some open questions relating to both the determination of controlled foreign corporation (“CFC”) status under certain tax code provisions and the ability for the U.S. to tax income related to the sale of interests in partnerships engaged in a U.S. trade or business. Section 864(c)(8), which was originally introduced under the TCJA, essentially provides that gain or loss derived from a foreign partner on the sale or exchange of a partnership interest in a partnership engaged in a U.S. trade or business is treated as effectively connected income and is subject to federal income tax in the U.S. While proposed regulations on the provision issued in 2018 had previously left taxpayers with some uncertainty as to the treatment of a foreign partner’s sale or exchange of partnership interest, the final regulations, released in September 2020, clarify that a foreign partner’s distributive share of a deemed gain or loss from the sale of his or her partnership interest would not include amounts otherwise excluded from the foreign partner’s gross income or which are exempt from U.S. federal income tax. With respect to the determination of CFC status under certain tax code provisions, the IRS has also released guidance clarifying questions raised by the TCJA’s repeal of a stock attribution rule preventing the downward attribution of stock from a foreign person to a U.S. person. By increasing the number of U.S. persons considered to be shareholders of a corporation, the repeal of this provision, when taken into account with certain other constructive ownership provisions of the tax code, significantly increased the number of foreign corporations treated as CFCs. Final regulations released by the IRS in September 2020 provide relief to affected taxpayers in the form of safe harbor provisions, penalty relief, and various modifications to statute intended to narrow the definition of CFCs to be more consistent with its previous definition. While proposed regulations have been issued as part of an attempt to provide further guidance as to the ramifications of the repeal, and should be finalized in the upcoming year, taxpayers should be aware that not all of the new provisions are beneficial – as not treating a foreign corporation as a CFC could, in some cases, actually hurt the taxpayer’s ultimate tax positions. As a result, taxpayers are recommended to have a financial analysis conducted in order to determine the full impact of these updated provisions.