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TEI Houston Tax School

Upstream/Downstream international

implications of US Tax Cuts and Job Act

27 February 2018

Upstream/downstream international implications of Tax Jobs & Cuts Act

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views of Ernst & Young LLP.

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does

not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s

facts and circumstances.

► These slides are for educational purposes only and are not intended, and should not be relied upon,

as accounting advice.


Agenda

► Introduction

► Key international related provisions of the Tax Cuts &

Jobs Act (TCJA) impacting upstream and downstream

operations

► Global intangible low-taxed income (GILTI)

► Base erosion anti-abuse tax (BEAT)

► Other – 163(j), 245A

► The “new” foreign tax credit world

► Questions and closing


Presenters

Joshua Ruland

Executive Director – ITS National Tax, Washington D.C.

Ernst & Young LLP

Direct: +1.202.327.7238

Mobile:+1.734.678.8232

[email protected]

Michael Masciangelo

Partner – International Tax Services, Houston

Ernst & Young LLP

Direct: +1.713.750.5232

Mobile:+1.312.315.9290

[email protected]

Upstream/downstream international implications of Tax Jobs & Cuts Act 4

Introduction


Status and expectations on guidance

► Section 965

► Notice 2018-7 and Notice 2018-13

► Rev Proc 2018-17 (disguised GILTI notice)

► One more – March/April timeframe

► Others (BEAT, GILTI, 267A)

► Commentary from Treasury trending toward reliance more on

regulations than Notices

► Timing – attempting to get them done in 18 month window

(particularly around 267A, BEAT and perhaps GILTI) to potentially

allow retroactive application

► Any hope for technical corrections?


Key international related provisions of the Tax Cuts &

Jobs Act (TCJA) impacting upstream and downstream

operations


GILTIIntroduction

► GILTI is a new “catch all” category of anti-deferral for certain CFC income

► Theoretically intended to prevent US base erosion under the new territorial regime

► Reality is that it is much more expansive in terms of its potential reach and

associated implications

► Subject to limitations, domestic corporations are entitled to a deduction for

its GILTI (beware of US TI limits!)

► From 2018 - 2025, GILTI deduction is 50%

► After 2025, GILTI deduction is 37.5%


GILTIOverview

► Pursuant to Section 951A, a US shareholder of any CFC for any taxable year

must include in gross income its GILTI for such taxable year.

► A US shareholder’s GILTI for any taxable year equals the excess (if any) of:

► Such US shareholder's “net CFC tested income” for such taxable year, over

► Such US shareholder's “net deemed tangible income return” for such taxable

year.

► The inclusion of GILTI is generally treated similarly to subpart F.

► Effective for tax years of foreign corporations beginning after December 31,

2017, and for tax years of US shareholders in which or with which such tax

years of foreign corporations end.

GILTI Net CFC Tested IncomeNet Deemed Tangible

Income Return


GILTICFC tested income

► Net CFC tested income with respect to any US shareholder is the excess (if any) of:

► The aggregate of the US shareholder’s pro rata shares of the “tested income” of each CFC with

respect to which such shareholder is a US shareholder for such taxable year, over

► The aggregate of such shareholder's pro rata share of the “tested loss” of each CFC with

respect to which such shareholder is a US shareholder for such taxable year.

► Tested income is basically all CFC taxable income other than other categories of Sub F (or those

excluded from Sub F because of the high tax exception), foreign oil & gas extraction income

(FOGEI) and ECI. Noticeably absent is foreign oil related income (FORI)

► Net deemed tangible income return with respect to any US Shareholder is the excess

(if any) of:

► 10% of the aggregate of the US shareholder’s pro rata shares of each CFC’s “qualified business

asset investment” (QBAI), over interest expense allocable to CFC tested income to the extent

that the interest recipient is not taking such amount into account in determined CFC Tested

Income

GILTI Net CFC Tested Income Net Deemed Tangible Income Return

GILTI Tested Income Tested Loss 10% of QBAICertain interest

expense


GILTIQBAI

► QBAI equals the CFC’s average aggregate adjusted bases for “specified

tangible property” during the taxable year.

► Measured quarterly.

► Adjusted basis is determined by using the alternative depreciation system under

Section 168(g).

► Depreciation is allocated ratably to each day during the period in the taxable year to

which such depreciation relates.

► “Specified tangible property” is any tangible property used in the production

of tested income.

► Must be used in a trade or business of the corporation.

► A deduction under Section 167 (depreciation) must be allowable for such property.

► Property is treated as specified tangible property in the same proportion that property

generates tested income bears to total gross income produced by the property.


GILTIThe unanticipated return of the FOGEI and FORI split

► The exclusion of an exception of FORI from the definition of CFC Tested

Income necessitates the need to analyze such amounts separately again

► Calculation of CFC Tested Income (including deductions and taxes properly allocable to such

amounts)

► The determination of QBAI related to the FORI activity

► The allocation of interest expense to FORI

► Determination of foreign income taxes “properly attributable” to the GILTI for foreign tax credit

(FTC) purposes

► FOGEI generally income associated with the extraction of minerals up to the

wellhead. FORI generally most everything else.

► How should we price or determine those income streams?

► How do we determine the QBAI associated with the FORI activity?

► How do we determine the foreign taxes properly attributable to the FORI

activity on an annual basis (no pooling for GILTI)?


GILTIThe unexpected return of the FOGEI & FORI split (con’td)

Upstream Midstream - Refining

Midstream - Transport Downstream

FOGEI

• Extractive income from an economic interest in

minerals and dividends attributable to FOGEI

• Generally activities up to the wellhead (may exclude

certain chemical production techniques)

FORI

• Income from marketing, distributing, processing and

transporting minerals and primary products, and

dividends attributable to FORI


GILTI GILTI Foreign tax credit (FTC) provisions

► New Section 960(d): A domestic corporation is deemed to have paid foreign income

taxes equal to 80% of:

► Its inclusion percentage (GILTI divided by the aggregate of its pro rata shares of the tested

income of its CFCs); multiplied by

► The aggregate tested foreign income taxes (foreign income taxes paid or accrued by a CFC

properly attributable to the tested income of the CFC taken into account by the domestic

corporation under section 951A)

► New section 904(d) creates a limitation for non-passive GILTI with no carryback or

carryforward of any excess FTCs (if applicable)

► Section 78 gross-up – 100% of deemed paid taxes are treated as a dividend from the

foreign corporation (except for purposes of sections 245 and 245A)

► Basket of Section 78 gross-up? GL vs GILTI?

► Section 907 overlay to all of the new FTC baskets (GILTI, foreign branch basket)?

► Absent other guidance, as a Section 904 basket, expenses presumably are going to

need to be allocated and apportioned to GILTI income

► Application of the separate limitation loss (SLL) rules too?


GILTI The GILTI deduction

► Section 250(a)(1)(B) generally allows a 50% deduction for the GILTI inclusion and the

Section 78 grossup associated with the GILTI in the taxable year

► Section 250(a)(2) generally provides a limitation on the amount of the GILTI (and FDII)

deduction for the year. Essentially the deduction is limited to the extent that the gross

GILTI (including Section 78 grossup) and FDII exceeds taxable income

► Depending on NOLs or current year losses, could have the effect of having an effective

21% tax rate on the GILTI income irrespective of the taxes paid offshore

► Other issues (CFCs held by US partnerships)?


GILTI The GILTI deduction (cont’d)

USP

US Sub

CFC 1

CFC 2

USP

US Sub

CFC 1 CFC 2

US LLC

► Entity vs Aggregate for Section 951A?

► If US LLC is the US shareholder with the 951A inclusion, then potential issue with Section 250(a) deduction because such deduction applies to a domestic corporation

► Similar issue exists in the Section 965 context for making election to apply installment method to the transition tax


Section 59A: BEAT When and to whom does it apply

► For applicable taxpayers in tax years beginning after December 31,

2017, the BEAT requires the computation of base erosion minimum

tax amount for a taxable year.

► The BEAT provisions applies to fiscal year taxpayers beginning with

their first tax year beginning in 2018.


Section 59A: BEAT When and to whom does it apply

► Imposed on an applicable taxpayer, which includes both foreign and

domestic corporations (other than RIC, REIT or S-corporation) that

has:

► Average annual gross receipts of at least $500 million for three-year

period ending with preceding taxable year.

► A base erosion percentage of at least 3% (or 2% in the case of a bank or

registered securities dealer), which is generally the aggregate amount of

base erosion tax benefits divided by the aggregate amount of all allowable

deductions.

► Members of a US consolidated group are aggregated, along with any

other US corporations commonly controlled by a foreign parent.

► Where the applicable taxpayer is foreign, only such person’s

effectively connected gross receipts are considered.


Section 59A: BEAT BEAT computation

Notes for computation

► 10% BEAT rate is 5% for tax years beginning in calendar year 2018, with a rate increased to 12.5% for tax years

beginning after 2025. BEAT rate is 1% higher during all periods for banks and registered securities dealers.

► Modified Taxable Income is computed as taxable income without regard to any base erosion tax benefit with

respect to any base erosion payment to a foreign person which is a related party, and without regard to any “base

erosion percentage” of any NOL deduction allowed under Section 172.

► Portion of Applicable Section 38 Credits is an amount not in excess of 80% of the lesser of the amount of such

credits or the base erosion minimum tax amount (determined without taking into account such applicable Section 38

credits).

► Applicable Section 38 Credits are the low-income housing credit, the renewable electricity production credit and the

investment credit, but only to the extent properly allocable to the energy credit.

► Note, for tax years beginning after December 31, 2025, regular tax liability is reduced by the aggregate amount of

credits allowed under Chapter 1 (and no other adjustment is made)

BEAT 10% All Ch 1

credits

Modified Taxable Income

XRegular

Tax Liability

+Portion of

Applicable Section 38 Credits

Result cannot be

below zero

Section 41 Research

Credit


Section 59A: BEAT Modified taxable income

► Base erosion payment includes:

► Any amount paid or accrued by a corporation to a foreign related party and with respect to which

a deduction is allowable, including amounts paid or accrued to acquire depreciable or

amortizable property.

► Any deduction for premium or other consideration paid or accrued by taxpayer to foreign related

party for any reinsurance payments taken into account under Sections 803(a)(1)(B) or

832(b)(4)(A).

► Any amount that constitutes reductions in gross receipts of the taxpayer that is paid or accrued

by taxpayer with respect to (1) a surrogate foreign corporation, as defined in Section 7874(a)(2)

which is a related party (but only if such person first became a surrogate foreign corporation after

November 9, 2017) and (2) a foreign person that is a member of same expanded affiliated group

as surrogate foreign corporation.

► Base erosion payment does not include

► Amounts that constitute reductions in gross receipts including payments for cost of goods sold

(except with respect to surrogate foreign corporations, as noted above),

► Amounts paid or accrued for services if such services meet eligibility requirements of the services

cost method (SCM) under Treas. Reg. Section 1.482-9, and

► Any qualified derivative payment, if certain requirements are met.



► Base erosion tax benefit means

► Any deduction allowed with respect to a base erosion payment,

► Any deduction allowed for depreciation or amortization with respect to an amount paid or accrued

in connection with acquisition of depreciable or amortizable property,

► Certain reductions under Section 803(a)(1)(B) and deductions under Section 832(b)(4)(A), or

► Any reductions in gross receipts with respect to a payment described above with respect to a

surrogate foreign corporation in computing gross income of taxpayer.

► Base erosion benefit where a payment is subject to US tax

► Where a base erosion payment is subject to tax under Sections 871 or 881, but at a reduced rate,

the base erosion tax benefit is the percentage difference between such reduced rate and the tax

imposed under those sections (i.e., 30%)

► Regulatory grant

► Broad grant of regulatory authority to issue rules addressing the use of

► unrelated persons,

► conduit transactions, or

► Other intermediaries, or transactions or arrangements designed to avoid the provision.



► Points of discussion

► Net operating losses – Modified Taxable Income is not reduced by the base erosion percentage of

any allowable net operating loss deduction allowed under Section 172 for the taxable year.

► Query – should taxpayers look to the base erosion percentage in the year the NOL is incurred,

or utilized as a reduction to Modified Taxable Income?

► Query – where current year base erosion percentage is used, how should taxpayers address

pre-2018 NOL utilization?

► Services payments – Modified Taxable income is not reduced by amounts paid or accrued for

services if such services meet eligibility requirements of the services cost method.

► Query – where SCM qualifying payments include a mark up, is the base erosion payment the

cost AND the markup, or just the markup?


Section 59A: BEATKey issues for potential guidance

► Are SCM costs excluded only if they do not contain a markup?

► Application to qualified cost sharing arrangements

► Post 2017 deductibility for excess interest carried forward under old

Section 163(j)

► Pre 2018 NOLs utilized in Post 2017 years – What is the base erosion

percentage based on (the year incurred, the year utilized or the year

utilized but only for Post 2017 NOLs)?

► Application of COGS exception


Section 163(j) – Interest expense limitation

► Deduction for “net business interest” expense (to related or unrelated

parties) limited to:

► Business interest income

► Floor plan financing interest; and

► 30% of “adjusted taxable income” (ATI) for the year

► Applicable to all taxpayers (including applied at the partnership and s-

corporation level)

► “Small business exception:” taxpayers with average annual gross receipts

of US $25m or less during the prior three-year period

► Exception for interest allocable to certain businesses:

► Utilities

► “Electing real property” and “farming businesses”



► Adjusted taxable income: Taxable income determined without

regard to the following items:

► Items not properly allocable to a trade or business (i.e., investment

interest)

► Business interest income and expense

► NOL deduction

► Section 199A deduction, and

► For tax years beginning before January 1, 2022, any deduction for

depreciation, depletion and amortization (DD&A). What about expenses

vs capitalized IDCs?

► Indefinite carryforward of interest expense disallowed by the

provision.

► Need additional guidance on how to treat pre-effective date 163(j)

carryforwards

► Generally no concept of carryforward limitation as under prior law (but see

partnership provisions)



► Partnerships/S-corporations: Limitation applies at the partnership

level, and any deduction for business interest is taken into account in

determining the non-separately stated taxable income or loss of the

partnership.

► Partner’s ATI computed without regard to partnership distributive share

but if partnership has excess limitation, the partner can use “excess

taxable income” to increase it’s limitation in subsequent years

► All other code provisions limiting interest apply before application of

section 163(j) (e.g., section 267)

► Even if clear 163(j) hurdle, if paid foreign related party it may come within

section 59A

► Effective for taxable years beginning after December 31, 2017.


Section 245A & 267A


Section 245AOverview and summary of relevant rules

► Received from specified 10-percent owned foreign corporation

► Received by a domestic corporation that is a US shareholder

► Paid out of undistributed foreign earnings

► One-year holding period

► Not a hybrid dividend (see next slide)

► Effective for distributions made after December 31, 2017

Sec.245A (a) “In the case

of any dividend received

from a specified 10-percent

owned foreign corporation

by a domestic corporation

which is a United States

shareholder with respect to

such foreign corporation,

there shall be allowed as a

deduction an amount equal

to the foreign-source

portion of such dividend”



► A hybrid dividend is an amount received from a controlled foreign

corporation:

► For which a Section 245A dividend received deduction would

otherwise be allowable, and

► For which the CFC received a deduction (or other tax benefit)

with respect to any income, war profits or excess profits taxes

imposed by any foreign country of US possession.

► Lower tier hybrid dividends: if one controlled foreign corporation

receives a hybrid dividend from another controlled foreign

corporation, and a domestic corporation is a US shareholder of both

CFCs, then:

► the hybrid dividend is treated as Subpart F income of the

distribute, and

► the US shareholder must include in income its pro rata share of

the Subpart F income.

► No credit or deduction is permitted for foreign income tax paid or

accrued (or treated as paid or accrued) with respect to a hybrid

dividend or a hybrid-dividend Subpart F income inclusion.

Sec.245A (e) “Subsection

(a) shall not apply to any

dividend received by a

United States shareholder

from a controlled

foreign corporation if the

dividend is a hybrid

dividend”


Section 245AOverview impacted scenarios [Tentative]

Scenario Potentially

impacted

Likely

not impacted

Luxembourg (Convertible) Preferred Equity Certificates (C/PEC) X

Debt and Forward Subscription Agreement (typical jurisdictions: Canada,

Luxembourg, Netherlands)X

Brazilian Interest on Net Equity (INE) X

Notional Interest Deduction (NID) regimes

(typical jurisdictions: Belgium, Cyprus, Italy, Liechtenstein)X

French Obligation Remboursable en Actions (ORA) X

Dutch (open) taxable CV X

Israeli Capital Notes X

Belgian PPL X

Irish Section 110 loan (PPL) X

India Compulsorily Convertible Debenture (CCD) X

Group relief transactions X

Overleveraged CFC X



► The term ‘disqualified related party amount’ means any interest or

royalty paid or accrued to a related party to the extent that

► Such amount is not included in the income of such related party

under the tax law of the country of which such related party is a

resident for tax purposes or is subject to tax, OR

► Such related party is allowed a deduction with respect to such

amount under the tax law of such country.

► Such term shall not include any payment to the extent such

payment is included in the gross income of a United States

shareholder under section 951(a).

► The term ‘related party’ means a related person as defined in section

954(d)(3), except that such section shall be applied with respect to

the person making the payment described in paragraph (1) in lieu of

the controlled foreign corporation otherwise referred to in such

section.

► Effective for taxable years beginning after December 31, 2017.

Sec.267A (a)“No deduction

shall be allowed under this

chapter for any disqualified

related party amount paid

or accrued

pursuant to a hybrid

transaction or by, or to, a

hybrid entity”

Sec. 267A (a) has a two

prong test. This slide

outlines the first test.



► A hybrid transaction is any transaction, series of transactions or

instrument:

► One of more payments with respect to which are treated as

interest or royalties for US federal income tax purposes, and

► Which are not so treated for purposes the tax law of the foreign

country of which the recipient of such payment is resident for

tax purposes or is subject to tax.

► A hybrid entity means any entity that is either:

► Treated as fiscally transparent for US federal income tax

purposes but not so treated for purposes of the tax law of the

foreign country of which the entity is resident for tax purposes

or is subject to tax, or

► Treated as fiscally transparent for purposes of such tax law but

not so treated for US federal income tax purposes [reverse

hybrid]

Sec.267A (a)“No deduction

shall be allowed under this

chapter for any disqualified

related party amount paid

or accrued

pursuant to a hybrid

transaction or by, or to, a

hybrid entity”

Sec. 267A (a) has a two

prong test. This slide

outlines the second test.



► Rules for treating certain conduit arrangements which involve a

hybrid transaction or a hybrid entity as subject to the provision

► Rules for the application of the provision to branches or domestic

entities

► Rules for the application of the provision to certain structured

transactions

► Rules for treating a tax preference as an exclusion from income for

purposes of a disqualified related party amount of the tax preference

has the effect of reducing the generally applicable statutory rate by

25% or more

► Rules for treating the entire amount of interest or royalty as a

disqualified related party amount if such amount is subject to a

participation exemption system or similar system which provides for

the exclusion or deduction of a substantial portion of such amount

► Rules for determining the tax residence of a foreign entity if the entity

is otherwise considered resident in more than one country, or of no

country

► Exceptions to the general rules for (i) case in which the disqualified

related party amount is taxed in a third jurisdiction, and (ii) other

cases the Secretary determines do not present a risk of eroding the

federal tax base

► Requirements for record keeping and information reporting in

addition to any requirements imposed by Section 6038A

Sec.267A (e) “The

Secretary shall issue such

regulations or other

guidance as may be

necessary or appropriate to

carry out the purposes of

this section, including

regulations or other

guidance providing for”

In other words, Sec. 267(e)

grants significant, broad

and specific regulatory

authority which needs to be

monitored going forward.


Section 267AOverview impacted scenarios [Tentative]

Scenario Likely to be in

scope

Requires further

consideration

Likely not to be

within stat.

language but may

be within reg.

guidance

Does not appear

to be within scope

of either stat.

language or reg.

guidance

Inbound (US – foreign) scenarios: non-deduction of payment by US

REPO transactions X

Hybrid preferred shares X

Irish bonus debenture X

Irish principal first loan X

US reverse hybrid (USLP/USGP) X

IFL structures X (category i)

Canada / Luxembourg MRPS X (category i)

Polish fund structure X (category iii, iv or v)

US branch structures X (category ii)

NID regimes X (category iv or v)

Vanilla loan from equity funded low

taxed jurisdiction X


The “new” foreign tax credit world


Changes to foreign tax credit regime

► For taxable years of foreign corporations beginning after December 31, 2017, and for

taxable years of US shareholders with or within which such taxable years end:

► Section 902 is repealed.

► Section 960(a) modified to limit deemed paid credit on subpart F income inclusion to foreign

income taxes “properly attributable” to the inclusion

► “Properly attributable” presumably follows principles of Regs. 1.904-6

► Section 960(b) modified to clarify how foreign taxes subsequently paid on PTI distributions are

available as credits to the US shareholder

► For taxable years beginning after December 31, 2017:

► New section 904(d) limitation added for GILTI inclusions

► New section 904(d) limitation added for foreign branch income from Qualified Business Units

(QBUs)

► Guidance needed on how prior FTC c/fs related to branches may be used

► Section 904(g) modified to allow up to 100% Overall domestic loss (ODL) recapture (pre-2018

ODLs) until 2028

► Overlay of Section 907 within each basket?

► FMV of interest expense apportionment repealed – tax book value/alternative tax book

value only methods remaining


Changes to foreign tax credit regime (cont’d)

► Expansion of the baskets and the lack of FTC carryovers for GILTI FTCs could cause

significant issues with those companies with FORI or other GL income offshore

► Every dollar of expense allocation to GILTI is a cost

► US taxable income profile impacts FTC profile significantly

► 907/904 interplay significantly more complex

► Are CFCs the best answer going forward in all circumstances?

► Should certain branches be incorporated?

► Enhanced focus on FTC limitation and expense allocation and apportionment in general

► Coming off of FMV and basis bump under tax book value method – all of the PTI from

the toll charge?


Importance of expense allocation and apportionment post-TCJA

► FTC limitation – Deductions at the US shareholder level must still be

allocated and apportioned to US shareholder gross income in determining

FTC limitation by category

► New Section 904(d)(1)(A) GILTI basket – What deductions should be allocated and

apportioned to GILTI basket income?

► New Section 904(b)(5) – In determining FTC limitation, foreign source and entire

taxable income are determined without regard to Section 245A qualifying dividends

and without regard to deductions properly allocable or apportioned to non-sub

F/non-GILTI income

► Subpart F income – Deductions at the CFC level must still be allocated and

apportioned to CFC gross income to determine net subpart F income

► New Section 951A(c)(2)(A) - CFC tested income is determined net of deductions

properly allocable to such gross income (see Section 954(b)(5) and Reg. §1.954-

1(c)(1)(i)(B))

► Foreign-Derived Intangible Income Deduction

► New Section 250(b)(3)(A) – Deduction Eligible Income is determined net of

deductions properly allocable to such gross income


Interest expenseOverview

► Applies to §163 interest and certain interest equivalents (e.g., bond premium,

factoring discounts, certain hedging and foreign currency losses); must use

gross interest expense, cannot net

► Asset method apportions interest expense to the various statutory groupings

based on average total value of assets within each such grouping for the tax

year. Reg. §1.861-9T(g)(1)

► Asset valuation rules found in Reg. §1.861-9T(g)(1) and (2)

► Asset characterization rules found in Reg. §1.861-9T(g)(3) and Reg. §1.861-

12T

► Rules reflect underlying premise that money is fungible (indebtedness

incurred to acquire particular assets frees up funds to acquire other assets)

► Average BOY and EOY assets, unless distortive (e.g., monthly average may

be required in case of significant acquisition or disposition during the year)

► Asset values based on tax book value, alternative tax book value or (for tax

years beginning before 1/1/18) fair market value


Interest expenseOverview (continued)

► Exceptions to asset-based apportionment:

► “Modified gross income” method may be elected by:

► CFCs (Reg. §1.861-9T(j)) and non-controlled section 902 corporations (Reg. §1.861-

9(f)(4))

► Under Reg. §1.861-10T, direct allocation required for interest on:

► Certain qualified non-recourse indebtedness;

► Certain integrated financial transactions with unrelated persons (e.g., debt incurred

to finance investments that generate interest or interest equivalent income);

► US indebtedness incurred directly or indirectly to finance related CFCs (“CFC netting

rule”)

► Under Reg. 1.861-11T, special affiliated group rules apply:

► Interest expense of each member apportioned based on asset apportionment ratios

computed as though all members of the group were a single corporation

► Loans between members of an affiliated group not considered an asset of the

member lender

► Member lender’s interest income sourced based on groupings to which member

borrower’s interest expense is apportioned


Interest expenseTBV method: Asset characterization

► General rule - Assets are characterized based on the source and type of

income they “generate, have generated, or may reasonably be expected to

generate” Reg. 1.861-9T(g)(3)

► The value of assets within each statutory and residual grouping is determined

by dividing all assets into three types:

► 1. Single-category assets - generate income that is exclusively within a single

statutory grouping or the residual grouping

► 2. Multiple-category assets - generate income in more than one grouping

► 3. Assets without directly identifiable yield - have no directly identifiable yield

or contribute equally to the generation of all income of the taxpayer

► These assets are not taken into account for purposes of asset-based

apportionment

► Value of assets prorated among groupings according to proportion of gross

income generated by assets in each grouping


Interest expenseTBV method: Characterization of CFC stock

► Under Reg. 1.861-12T(c)(3), CFC stock characterized based on interest

apportionment method (asset or modified gross income) used at CFC level

► If CFC uses asset method:

► Characterize tax book value of CFC stock based on its assets (apply -9T(g))

► Stock of lower-tier CFCs must be similarly characterized

► Begin with assets of lowest-tier CFC, then proceed up the chain to the

first-tier CFC

► If CFC uses modified gross income method:

► Characterize tax book value of CFC stock based on gross income (net of

interest expense) of CFC within each category

► Use gross income of the CFC for the tax year ending with or within the tax

year of the US taxpayer

► Gross income computed as under – 9T(j), except that gross income of

first-tier CFC includes total net Subpart F income of lower-tier CFCs


Interest expenseTBV method: Basis adjustment for E&P

► Under TBV method, taxpayer’s adjusted basis in stock of a 10%

owned corporation owned directly (or indirectly through a partnership)

is increased or reduced (but not below zero) by E&P (or deficits in

E&P) attributable to such stock and accumulated during the period the

taxpayer or other members of its affiliated group held 10% or more of

such stock. Reg. §1.861-12(c)(2)

► Annual determination, based on accumulated E&P (or deficit) at EOY

► E&P includes pro rata share of E&P (or deficit) of each succeeding lower-

tier 10%-owned corporation

► E&P determinations are made under §§312, 902, and 1248

► Solely for purposes of computing the basis adjustment for E&P, the basis

of CFC stock does not include amounts included in basis under §961 or

§1293(d)

► §864(e)(4)(D) requires “proper adjustment to E&P” for inclusions reflected

in basis


Interest expenseSelected issues

► Can a taxpayer both exclude §961 basis from stock basis as required by Reg. 1.861-

12T(c)(2)(i)(B) and, per reference to §1248, exclude PTI from E&P bump?

► How should the “generate, have generated, or is reasonably expected to generate”

language of Reg. 1.861-9T(g)(3) be applied?

► Should this be viewed as an ordering rule? Can stock basis be considered General basket

forever because a component once generated such income? Should it be considered a

multiple category asset?

► How is Reg. §1.861-9T(g)(3) applied under the Modified Gross Income or Asset

methods of Reg. §1.861-12T(c)(3)?

► Does the asset method, which is based on the application of Reg. 1.861-9T(g) at the level of the

CFC, produce essentially the same result as the modified gross income method? If so, why are

there two methods?

► How does 904(b)(5) apply to interest expense apportionment and what is its impact?

► Is §904(b)(5) the reason §245A is not included with the other DRD provisions in §864(e)(3)?

► How does Section 965(b)(4) impact my E&P bump?


Questions and closing


Thank you for coming!


Appendix


Biography – Michael J. Masciangelo

► Michael J. Masciangelo is a partner in and member of Ernst & Young LLP’s International Tax Services practice in Houston. Michael is responsible for leading Ernst & Young’s global resources in designing and implementing a variety of strategies for our clients.

► Michael has worked with several Ernst & Young offices since joining the firm in 1995 and has over 22 years of experience in corporate and international tax. Michael has concentrated on both outbound and inbound clients across a broad range of industries focusing for the past seven years primarily in the Energy sector. In addition to his specific client serving role, he serves as the firm’s International Tax Think Tank Leader for the Southwest Region and performs a similar role for other international tax technical initiatives within the firm most recently related to US Tax Reform.

► Michael has been actively involved in advising our clients on opportunities to reduce their global tax burdens and minimization of risk. His work includes advising on internal and external restructurings, financing/repatriation, acquisitions, joint ventures, foreign tax credit matters, and tax implications of global supply chain initiatives. He has also been involved with complex tax provision reviews, research of and advising on tax accounting issues and has extensive experience in advising on matters of foreign source income and expense allocation and apportionment.

► Michael has B.B.A in accounting from Kent State University and Master of Taxation from the University of Denver. He is a certified public accountant licensed in the states of Ohio, Illinois, and Texas. He has instructed at internal seminars and many US and European client and educational seminars including Atlas, CITE and TEI.

Michael J. Masciangelo

Contact information

Tax Partner – International

Tax Services

Tel: +1 713 750 5232

Mobile: +1 312 315 9290

Fax: +1 866 273 6659

[email protected]


Biography – Joshua Ruland

►Joshua Ruland is an Executive Director in Ernst & Young LLP’s International Tax Services practice in the National Tax Department. He is based on Washington, D.C., and advises clients on all aspects of US international and partnership taxation, particularly cross-border acquisitions, dispositions, joint ventures and restructurings.

►Prior to joining EY, Joshua was a Senior Counselor in the Corporate Tax Department of Hess Corporation, a US-based multinational oil and gas company. At Hess, Joshua designed and implemented cross-border restructurings and repatriations, and provided tax advice related to acquisitions, dispositions, joint ventures, master limited partnerships, restructurings and other major corporate transactions. He was based in New York, NY, and Houston, TX.

►Prior to that, Joshua was a law clerk for the Hon. Cornelia G. Kennedy of the United States Court of Appeals for the Sixth Circuit, based in Detroit, MI.

►Joshua earned a B.B.A., with distinction, from the Ross School of Business at the University of Michigan. He earned his J.D., cum laude, from the University of Michigan Law School.

Joshua Ruland

Contact information

Executive Director –

International Tax Services

Tel: +1 202 327 7238

Mobile: +1 734 678 8232

[email protected]

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