International Tax Provisions
• Deferral of the interest expense deduction that is properly allocated and apportioned to foreign-source income that is not currently subject to U.S. tax. The deferred interest expense would be deductible in a subsequent taxable year in proportion to the amount of the previously deferred income, that is subject to tax during that year.
• A requirement for a U.S. taxpayer to determine its “deemed-paid” foreign tax credits on a consolidated basis based on the aggregate foreign taxes and earnings and profits of all of its foreign subsidiaries.
• A “matching” rule would be adopted to prevent the unwarranted separation of creditable foreign taxes from the associated foreign income.
• A new trigger related to the tax code’s Subpart F. Subpart F is the tax code chapter containing the complex “antideferral” rules that force companies to pay tax on certain foreign-source income in the year it was earned, rather than when the U.S. parent repatriates the profits. The proposal states that if a U.S. person transfers an intangible asset from the United States to a related controlled foreign corporation (CFC) that is subject to a “low foreign effective tax rate,” and there is evidence that the transfer results in “excessive income shifting,” then an amount equal to the “excessive return” would be treated as a category of Subpart F income. As a result, the return would be includable in the gross income of the CFC’s “U.S. shareholders.”
• A provision to “clarify” that intangible property includes “workforce in place,” as well as goodwill and going concern value, in the case of transfers of intangible property to a foreign corporation. For instance, if a U.S. person transfers intangible property to a foreign corporation in certain nonrecognition transactions, the U.S. person is treated as selling the intangible property for a series of payments contingent on the productivity, use, or disposition of the transferred intangible.
• A tightening of the limitation on the deductibility of interest paid by an “expatriated entity” (for example, Tyco and Ingersoll-Rand) to related parties under Section 163(j) of the tax code. In this case, the debt/equity safe harbor would be eliminated, the 50% “adjusted taxable income” threshold would be reduced to 25%, the carryforward for disallowed interest expense would be limited to 10 years, and the carryforward of “excess limitation” would be eliminated.
• New treatment for income earned by foreign persons with respect to equity swaps. Under the proposal, the income would be treated as U.S. source income, and therefore subject to withholding tax to the extent that the income is attributable to, or is calculated by reference to, dividends paid by a domestic corporation. Under current law, this income escapes withholding taxes because income from a “notional principal contract” is sourced based upon the residence of the investor.
• A partner’s share of income with respect to a “Services Partnership Interest” (SPI) would be subject to tax as ordinary income, regardless of the character of the income at the partnership level. Moreover, gain recognized on the sale of an SPI would be treated as ordinary income. For this purpose, an SPI is defined as a carried interest held by a person who provides services to the partnership.
• “Black liquor” would be excluded from the definition of cellulosic biofuel. As a result, black liquor would not be eligible for the $1.01 per gallon cellulosic biofuel credit.
• No deduction would be allowed for punitive damages paid or incurred by the taxpayer. This is true even though the activities that gave rise to the lawsuit were performed in the ordinary conduct of the taxpayer’s trade or business (see Revenue Ruling 80-211, 1980-2 C.B. 57).
• A provision to “clarify” that a transaction satisfies the economic substance doctrine. Under the proposal, the doctrine would be satisfied only if the transaction changes, in a “meaningful way” (apart from federal tax effects), the taxpayer’s economic position and the taxpayer has a substantial purpose (other than a federal tax purpose) for entering into the transaction. A transaction would not be treated as having economic substance by reason of its profit potential unless the present value of the “reasonably expected” pretax profit is substantial in relation to the present value of the net federal tax benefits arising from the transaction.