2024 year-end tax planning: International and transfer pricing update

The following is a verbatim output of transcribing from a video recording. Although the information in this transcription is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or grammatical, spelling and transcription errors.

Ian Halligan: Afternoon, everybody. Good morning. Depending on where you are located. Welcome to Baker Tilly year end international tax and transfer pricing update. My name is Ian Halligan. I am a principal in a global tax group here at Baker Tilly. Our presenters today will be Matt Damone, who is a principal in our transfer pricing group. Jim Lawson who is a managing director and International Tax specialist at Washington tax counsel. And Nikki Grams, who is a senior manager and international tax specialist within our Washington Tax Counsel. Today, we're going to talk about a few things. We're going to get started with some election updates and scheduled changes to the law. We're going to talk a little bit about U.S. tax law changes and potential opportunities. We’re going to talk about some non-U.S. tax law changes and potential opportunities. And we're going to get some tax law updates. And so with all that I’m going to pass it over to Nikki Grams who’s going to start us off. Nikki over to you.

Nikki Grams: Thanks for that introduction. And again, my name is Nikki Grams and I'm a senior manager in the Washington Tax Counsel Group specializing in international and I'm going to kick us off today with talking about some scheduled changes that will take effect for tax years beginning in 2026. So these first few that we're going to talk about are TCJA scheduled changes. This isn’t an all inclusive list of scheduled changes, but just the ones with international significance. So the first one that we're going to talk about is BEAT, so notably BEAT, the tax rate will increase from 10 to 12 and a half percent coming up here, less notably, but equally as important. Certain credits that historically had not reduced regular tax liability for BEAT purposes will now be taken into account on a go forward basis. So what this means is that maybe companies with significant Section 38 credits, which might include R&D that hadn't historically been in the BEAT because of not reducing regular tax liability might find themselves in the BEAT. So that's something to consider going forward. GILTI, the GILTI 250 deduction will decrease from 50% to 37%, which is increasing the effect of GILTI tax rate to 13.125% for tax years beginning in 2026. And then lastly, FDII. FDII is scheduled to decrease as well to 21.875% from 37.5%. And this will increase the effective tax rate on qualified export activity that we have. So that's something to plan for going forward. Another scheduled change that isn't TCJA related is the CFC look through rule, Section 954 (c)(6)). So this rule generally provides an exception to subpart F for dividends, interest, rents and royalties from related CFCs which would normally be treated as foreign personal holding company income. So this provision was enacted in 2005 and historically has been re-extended.

So hopefully we'll get that same treatment. But if not, this provision will expire at the same time as FDII, BEAT, and GILTI for tax years beginning in January 2026. And now I'm going to kick it to Jim, who is going to be talking about some potential changes that might come in light of the election.

Jim Lawson: Thank you, Nikki. First, before we go through these, it’s important to understand the landscape in which we're working. As Nikki said, we're talking on talking of some of the changes that have international overlay and there's obviously a lot of changes, purely domestic otherwise that are up for that are being, you know, got to sunset under existing legislation if no action is taken and then other schedule changes which don't require any further legislative action.

But that may change the terms in which those provisions apply for post 2025 tax years, more or less. There's another session as part of this year and series, which Casey Pippin and others will talk a little bit more detail about the impacts the election policy and the process through getting legislative action through. For our purposes today, it's important to understand how this is going to happen, right?

So we have a Republican administration coming in and control of both the House and the Senate. However, not as much support probably to get through a normal 60 vote majority in the Senate to pass legislation without the need for a separate so-called budget reconciliation process. And that's what was used back as part of the 2017 Act that was put through the earlier Trump administration.

So unlike 2017, however, the majority that the Republicans hold is a very thin majority in each the House and the Senate. So don't think that this is just going to be a Republican only led exercise without some input on the Democratic side of the House as with before, where there was a larger majority, there were some defectors that didn't side on the Republican side.

And, you know, then caused the negotiation. So with a thin margin, expect that there will be some negotiation, but with that a consensus reached the budget reconciliation process, some changes can be put through without having to satisfy the filibuster rules and getting through the Senate. So that is a backdrop on the timing of potential tax law changes. The current administration is indicating having new tax changes in effect within a hundred days

of their administration.

It may sound pretty aggressive and it is, but their party has been working behind the scenes for some time and kind of developing out their tax plan. But again, subject to negotiation, consensus, outliers, the fact as to whether that will we're not done with that 100 days. Potential increase decrease in the corporate tax rate. Doubt that it's going up, you know, from the current 21% rate potentially we could as a negotiation point, if anything, staying at 21%, perhaps incentivizing manufacturing in the US and maybe moving more towards a 15% rate for manufacturers.

A full or partial extension of all TCJA the 17 Act policies will BEAT FDII and GILTI schedule changes that Nikki talked about take effect. You know, they may. And these are not sunsetting provisions. They still remain on the books. There’s an increased rates as Nicki had indicated, large company concerns and whatnot are heavily lobbying right now for reinstatement or for keeping their current existing rates that are in place through 2025.

In the interest of competitiveness for US multi-nationals, at a minimum, I expect maybe that there may be some work within the BEAT area to deal with that credit issue and that increases the gap and application to incentivize R&D here in the US. 174 restart immediate expensing for 174 research, experimental expenditures and for 163 (J) which is an interest limitation, potentially moving back to a 30% EBIT threshold as opposed to the EBITDA threshold as opposed to EBIT was part of some earlier bipartisan legislation package that got sold on the Senate floor.

You know, might that come back? Obviously, there's a high 174 median expense and there's a lot of interest in that and encouraging, you know, investment in R&D here in the US. There are some people out there to think that this may be a little bit old and cold right now and may not be one of the things that move in light of all the changes that need to go through extension to CFC look through why not it's been extended a number of times.

Future CAMT and stop repurchase excise tax. Not anticipating that CAMT is going to go away. Perhaps not stock repurchase, excise tax either. And the future of 987 regulations. Those regulations are proposed for now are very complex. There's also final regulations that were previously released and withdrawn when the Trump administration eventually pulled those regulations. So who’s to say what’s to happen to those final regulations, newly proposed regulations that were released, I believe, November of last year?

So what this slide does is look at planning in the midst of the rate disparity. So if a lot of the laws are to sunset in place and no legislative action was taken, individual rates would go up from a top marginal 37 to 39.6%. And then in operating through partnerships and ask for structures, a dollar of income earned might not qualify for a special 20% deduction under 199 cap A, which is set to sunset that effectively can result in an increase.

In fact, the rate of tax at 29.6%, the 80% of the 37% up to a full 39.6% marginal rate for individuals investing through partnerships and escorts. If the rate goes back up to 39.6% and sunsetting, and if the 199 cap a sunset off as well, I think that unlikely. I think the administration does want to reinstate those 37% and 199 cap a option as part of the first hundred day plan pass through.

And if not, and corporate rates remain at 21%, potentially reduce down to 15% for manufacturing. It does raise a greater disparity in rate between operating for C Corp structures through partnership structures and even on a full district basis may be cheaper. Operating a C Corp considering taxes at 21% and then 20% capital gains or dividends up to the shareholders.

But that differential can be greater for international operations. Respect, different special rules out there in the context of 50 guilty that's offered under section 245 cap A where you can really bring down an effective rate through the structure even below that 36.8% rate and make it a little bit more appealing for some to go through some modeling and see if that makes sense.

But that differential can be greater for international operations. Respect, different special rules out there in the context of 50 guilty that's offered under section 245 cap A where you can really bring down an effective rate through the structure even below that 36.8% rate and make it a little bit more appealing for some to go through some modeling and see if that makes sense.

But again, I would suggest that when 99 CAP is going to get reinstated and not allowed to kind of fall off and then perhaps a 37% rate, but if not, and that disparity increases, we might see a reemerging reemergence of icy desk planning, which are export incentives. A lot of companies shut down their ICI desk for not rate disparity was diminished, however, or some this left them on the shelf to maybe bring back when needed. This could be a situation that if that rate disparity does in fact increase.

Ian Halligan: Thank you, Jim. So that brings us to our first poll question. What schedule change do you think will impact your company the most? Is the tax rate increase the guilty effective tax rate increase or the 50 effective tax rate increase? Or when you can look, give you a minute here to see what these results look like. You've got quite a lot of not applicable in the ending, but the main one seems to be the deal with the effective tax rate increase seems to be impacting most.

Nikki Grams: Thank you, Ian. So now we're going to talk about some U.S. tax developments and other opportunities. And we're going to start off by talking about county as this is expected to be a revenue raiser. We anticipate that it's going to be here to stay. So it's going to be worth talking about a little bit today. This is not going to be an in-depth review of county by any means, but just kind of how it crosses over into the international space.

So generally, county is a 15% minimum tax imposed on adjusted financial statement, net income of large taxpayers. So taxpayers that might be subject to campaign are applicable corporations with average annual financial statement income working at the site exceeding 1 billion over a three year period. Smaller corporations could be in scope, though so applicable corporation can also mean a member of a foreign parent and multinational group.

If the entire group meets the 1 billion FSI test and the U.S. corporation has average annual A.I. of 100 million over a three year period, and there are some complex aggregation rules to determine whether or not certain groups or certain entities in the group are pulled into the test. And so if you need any assistance in determining what your foreign parent in multinational group is, please reach out and we'd be happy to assist.

Surprisingly, in the proposed regulations, they expanded the scope of the term foreign corporation to not only include foreign corporations, as you would expect, but also deemed foreign corporations. So in certain instances, this deeming provision may even treat foreign partnerships as a foreign corporation for the purposes of the FSI task. We'll see why this is important is second. So the regulations define a deemed foreign corporation as an ultimate parent entity that is not a corporation that directly or indirectly owns other than through a domestic operation, a foreign trade or business or an equity interest in a foreign corporation in which the ultimate parent entity has a controlling interest.

So we're going to walk through an example of what this could look like in the first scenario. Scenario A, we have a Cayman LP which owns a U.S. Corp 100%, which is a Mexican Corp 100% since the Cayman LP doesn't hold a direct interest in Mexico Corp and only through US Corp, Cayman LP is not a deemed foreign corporation and its FSI would not be included for the purposes of the aforesaid test.

However, if we look at scenario B, Cayman LP owns 15% directly in Mexico Corp and has a controlling interest in Mexico Corp through its interest in the US Corp. So Cayman up in scenario B would be treated as a deemed foreign corporation and its FSI would be included for the purpose of this pass. So you note that Cayman LP structure ultimately has a FSI of over 1 billion and U.S. Corp does have over 100 million, you know, assuming over the three year average period.

However, if we look at scenario B, Cayman LP owns 15% directly in Mexico Corp and has a controlling interest in Mexico Corp through its interest in the US Corp. So Cayman up in scenario B would be treated as a deemed foreign corporation and its FSI would be included for the purpose of this pass. So you note that Cayman LP structure ultimately has a FSI of over 1 billion and U.S. Corp does have over 100 million, you know, assuming over the three year average period.

So that's important to note, is that especially where you have private equity structures, there might be brother or sister and it is in the US core that your your investment partnership could trigger can't be in certain instances. And Jim, I'm not do you have anything to add there?

Jim Lawson: I'm sorry I think we are unmuted. Okay, good. Sorry. Technology issues there. Yeah, I just, you know, this was a little surprise when these proposed regulations came out on expanding where we could have foreign parent and multinational groups with partnership on partnerships on top giving a little bit of a concern for these structures in the private equity world as to what this could mean and expanding the impact of of of the county.

So an example here at the with the US of the the Cayman partnership let's say it only had $1,000,000 of of of income sitting there. But let's say a sister companies and our sister U.S. companies that are a part of that farm parent and multinational group. The potential that bring in other U.S. companies that are well, you know below what was the originally thought intended you know from the county and bring in more in the scope and some they thought would settle with your OGA through an amendment and the one in the county was was passed so it does instruct the be very careful in how you look at your your structured pie aggregation

rules to see if you're in the scope the 100 or so you know taxpayers originally contemplated to be fully in the soup. I don't know how much more of that is, but there's a lot of taxpayers that really still have it an analysis to do and document findings as to whether they are in the soup or not and a need to do more.

And these new deeming provisions for a farm parent, a multinational group, is just really added to the complexity.

Nikki Grams: Thank you, Jim. And lastly, it's important to note that, you know, proposed regulations and notice 2020 3-7 do provide for a simplified method of determining which corporations are the corporations. So the simplified method reduces the FSI threshold from 1,500,000,000. And then for foreign parent and multinational groups, it reduces the $100 million to 50 million. It also decreases the amount of adjustments required to calculate a five.

So it is important to note that the once you're out of the simplified safe harbor threshold, you're out and you can no longer use it. So you might have a case where, you know, you no longer meet the simplified, straight, harder, harder. You're still under the overall thresholds and not be subject to. Can't do that yet. You still have to follow, you know, the more complex calculation.

And the other thing to note is that if you are a corporation subject to Candy, there's additional reporting on the CFC level with respect to tearing up the the book income and adjustments for CFC. So that's important to note as we prepare our tax returns for the upcoming season.

Ian Halligan: Thanks, Nikki. That brings us to our second point question. Is your organization subject to corporate anti? We've got options of yes no, but we do not qualify for the simplified safe harbor. Nobody qualifies this employee wide safe harbor or not applicable. And I would guess I would hope that there would be less not applicable this time round. But let's see where we end up and give you a minute.

Jim Lawson: You and why we're waiting on that. And Nikki mentioned a simplified safe harbor for purposes of the county. I mentioned the additional complexity raised and flying aggregation roles. So if you trip off those revenue thresholds that are fully in the soup or not, it's important that you kind of do that upfront. It could dictate a lot of the additional work to follow and potential scope creep in your compliance work.

So to be kind of have some more certainty, I guess upfront and everything in going through that analysis and document documenting that you meet the simplified safe harbor but obviate the need for additional calculations, additional adjustments, stay on the CFO level, part of that 3471 reporting and overall potential scope creep that could occur.

Ian Halligan: To where I got about 500 responses and not applicable came in at half against I was wrong clearly. Okay, well, we'll close that poll down, Jim. I'm going to turn it over to you to talk about stock repurchase. Next step.

Jim Lawson: Okay. So I slide. Okay. So the stock repurchase excise tax was with the county was introduced as part of Inflation Reduction Act under the signed into law by the by the Biden administration. And it's simply it's a 1% excise tax that's applied on the the fair market value of, you know, of certain stock buybacks. I cover corporations. It's important to know we're talking about the international overlay side of things.

So this could impact U.S. subsidiaries of foreign publicly traded corporations and where stock in the foreign parent is, is buyback directly by a domestic sub or where there is trigger of when we purchase shares are considered funded by the U.S. subsidiary. These rules wanted to effect effectively for 2023 for calendar year filers. And in the midst of that, not having regulations notice 2020 3-2 was released that gave some level of clarity on the application of the rolls.

They provided for a funding role as part of this that notice and then since adopted in the proposed regulations, the earlier funding world first introduced was more of a per se rule that was very restrictive. So if a domestic supplier to make dividend or to make interest payments or other flows up to a foreign parent within a two year period of foreign parent reporting, that's a publicly traded stock that could be in scope of the excise the excise tax.

The program continued with the fund will introduce or not earlier notice but relax it a bit and change it to more of rebuttable presumption and apply it in more limited circumstances. So here the focus on the proposed regs is more in the nature of kind of downstream transactions where the U.S. sub is on top. I believe it's setting unnecessarily at that 50% type ownership threshold, but a lower 25% threshold.

This kind of affiliation on that's established on that. If like, say, a CFC of a domestic corporation were to buy back the stock of the indirect foreign parent, that could potentially implicate the rules as well under the funding law, under a rebuttable presumption, I think next I think I was going to transition that was this. Yeah.

Matt Damone: Yeah. Thanks. Thanks, Jim. So Ian mentioned the beginning. My name's Matthew Miller. I'm a transfer pricing partner here. Rebecca Kelly eventually lead the transfer pricing practice for the firm. We want to talk a little bit about some of the transfer pricing and international implications of Section 174. We're not going to dig into deep into what actually constitutes research and exploratory expenditures, but I think the key thing here to note is, you know, there was a lot of worry as ECJ inspired or the provisions expired whether or not we were going to be subject to double capitalization for foreign or even domestic contract R&D services.

And the notice in 2020 363. Right. That states the costs will not be treated as expenditures. Right. If the research is separate, there's financial risk according to contract terms. So what this is basically doing is alleviating the requirement to capitalize the expenses for contract R&D service providers, assuming that they meet certain provisions, whether or not they have further right to exploit the IP that's being created for the services provided.

And I think there was a little bit of confusion in 2023, 63 about what actually, you know, what's considered an excluded a three product, right? So in 2024 12, this gave us some clarity. So that basically allows for research providers to retain. So right away in order to commercialize, as long as it's not related to the actual R&D that's provided.

Right. So it's a separately bargained right to exploit sorry product. You know, what does that actually mean? It means that, you know, taxpayers need to understand who which entity in the group should economically own the intellectual property that's being created.

Then if the services are being provided to develop that IP and that intended party is not meant economically on the IP in, it's pretty clearly state that the contract the needs to also state that through the functions that are performed and then the transfer pricing model, one of them is narration.

So you know, that's used to to kind of perform these services. But taxpayers really should ask themselves, you know, which entity in the group wants to own the IP for which entity actually owns the IP based on, you know, the functions and assets then from an economic ownership perspective and then does, you know, the transactions that are in place, are they documented correctly, are remunerated correctly, are they structured correctly?

One thing to note, too, that is really related to the clustering transactions as part of 2020 363, and there's a somewhat complicated know mechanism to determine the appropriate capitalization and amortization of the expense. The key here, right, is that cost sharing expenses are capitalized on the books of the entity that ultimately incurs the cost after a

cost sharing payment is made.

Right. But the administration, period, whether it's five or 15 years, sticks with the entities that originally reported the cost. Right. And that's for U.S. purposes. I forgot the calculations. So that's really what you need to pay attention to. The you know, for 174 and for the three expenses. Right. I can move on here. Excuse me. Additional regulations were recently provided for in the regulations in October for the final 6360 regulations.

So these are, you know, primarily to address the repatriation of IP and the ability to extinguish the threat 6070 world to inclusion for outbound that I think these are deviations they closely follow the proposed regulations in 2023. There's not much material difference. I think they do offer a planning opportunity for certain tax payers who may have either inadvertently migrated the IP through different transactions or acquisitions and are now find themselves subject to three, six and seven.

The inclusion of or potentially maybe undervalued the IP, whether or not they were not taking into consideration the aggregation of IP, but other changes from CCJ. Right. Or if they were, you know, treating some of the operational IP versus non IP, non-operational IP, definitely. Right. So the one thing that's important to understand, we terminate the annual for 67, the inclusion.

There's two steps right. The the foreign entity needs to repatriate top end of IP to what's called a qualified domestic person right to them. The U.S. transfer complies with the reporting requirements under section six of 6030. And so you want to ask yourself, what is the qualified domestic person for qualified domestic person? It can be the original U.S. transfer.

It can be the successor U.S. transfer subject to federal income tax. U.S. income tax. Right. Or for being related, the entity subject to U.S. family contract. So the repatriation extinguishes a 36. So the inclusion if it goes to the same person that originally transfer the successor. Right. Or a related person within the same group as long as you send it to U.S. tax, you know, that's really what is going to create a qualified domestic person.

So the only thing to do is to really consider here. Right. And then the commentary, final regulations of Treasury that address the risk of double taxation, but it didn't funnel regulations that are meant to address all concerns. So I think there is some additional work that would need to be done in order to make sure there is not double taxation, both from a foreign level or a domestic level associated with the repatriation. Thanks. Back to, I believe, Jim.

Nikki Gram: I think it's me.

Matt Damone: Oh, sorry.

Nikki Gram: No, no worries. So we're going to briefly talk about notice 2023, Dash 80. The notice came out at the end of 2023. So it's a little bit old, but not necessarily gold. They mostly talk about two important topics that cross into the international space, and that's foreign tax credits and dual consolidated losses. So with regards to foreign tax credits, it talks about whether or not or to top up taxes would be considered creditable in the foreign tax credit regulations.

So generally, the rules state that fewer entities are expected to be creditable for U.S. taxpayers that are subject to empty. Is IRS importantly would not be creditable. And this is mostly because when calculating in IRR for the purposes of Pillar two, U.S. tax liability is generally taken into account, which means that without this rule that the calculation would be very circular in nature.

It's important to note that even though we don't get a credit for it, we will need to gross up sections of the gross out for the higher taxes. However, we wouldn't get a deduction for those taxes paid if two. If you choose not to take a credit and the IRS wouldn't be included for the purposes of the guilty or some part of high tax exclusions, the notice does not address credibility issues.

With respect to the UTR and notably does not address ETR with respect to DCL either. However, it is important to note that it does extend relief provided under an earlier notice that allows taxpayers to use or to determine predictability of foreign taxes paid without the complex attribution requirements from the final regulations that were released in 2022. So that reliefs are sorry that relief will extend to the date before the future guidance is released.

So it's important to note that while not likely, if, for instance, a guidance was issued by 1231 2020 for taxpayers filing for calendar 2024, we need to file follow the final regs or the or the updated when when preparing their 2024 tax return. There was a recent panel where a representative from the IRS said that do not hold your breath when it comes to additional guidance with respect to foreign tax credit.

So it's unlikely that there will be guidance issued before the end of the year. With respect to details, the IRS announced that they intend to release proposed regulations, which we'll talk about in a second. Associate since the release and provide relief for legacy decals that were incurred in dates prior to the effective date of the pillar. Two rules.

So the proposed ECL regulations I mentioned were released this August and they addressed mostly pillar two, but also some additional unexpected guidance so far with regards to Pillar two, the guidance provides that PBM duties and IRAs will be considered income taxes when applying the ECL rules. So this is important because because they are deemed to be income taxes, that means when we do our jurisdictional aggregation calculation and we might use losses to offset income of other entities from the same jurisdiction, that would be considered a foreign use.

And so if we had made a domestic selection on our tax return and then the loss is used again for the purposes of Pillar two, we'd have to recapture that loss and be subject to an interest charge. And further, they say, even if you're using the loss for the purposes of the analyzing qualification under the transitional TBR safe harbor, that could also be a foreign use.

So you could find yourself in an instance where you're not even subject to pillar two because you need the safe harbor, but you still have a foreign use under the the DCR rules. So there is an exception under a recent administrative guidance that says that well that provides for a duplicate loss rules that jurisdictions can choose to apply, which basically preserves a taxpayer's ability to choose which for which purpose the losses used.

So for instance, if they don't use it for pillar two purposes, but they use it for U.S. purposes, that would not be a foreign use. But again, that's a jurisdiction by jurisdiction analysis. So it is not a general general statement by any means. And the relief extends the definition of legacy vehicles to losses incurred the day before the proposed regulations are released so that is something to keep in mind as well.

Legacy vehicles would be considered. The use of legacy vehicles would not be considered foreign use under the resale rules. So some other important guidance to note is that they released or they released guidance on how the DCL rules interact with the matching principle under the consolidated return regulations and they designate a special status with respect to that. So basically what that means is that where you would generally have to take a deduction for the corresponding income item on a intercompany payments, you don't necessarily have to take the deduction if it would create a foreign law.

So that was an important clarification the regulations provided. Another item, they said, is that items arising from the ownership of stock, excluding portfolio stock, would no longer be attributed to a foreign separate unit. So this is important because in the instance where you have a U.S. corporation with ownership of a foreign disregarded entity that might hold, for instance, a CFC and that CFC pays a dividend to the foreign disregarded entity that would be income to the the U.S. taxpayer, not the foreign destroyer identity.

And under prior rules you would consider, you would attribute that income to the foreign disregarded entity when computing your ECL. That's no longer the case. The proposed rules say that that wouldn't be allowed, and so you might have instances where an entity wouldn't have been in the field position before that might find itself in the new position now.

And lastly, the regulations introduce novel disregarded payment rules so this can occur when there's disregarded interest or royalty payments that create a deduction, no exclusion outcome, which basically means you're allowed a deduction at one jurisdiction, but there's no jurisdiction picking up the the income in the DPR rules are separate from the DCA rules and require separate tracking and certification.

And most importantly, when we make future check to box elections to these proposed regulations, the final taxpayers will have to consent the DPR rules. And further, if have already made it, check the box election and have not restructured within one year you're deemed to have consented to the detailed rules. So there's really no way of avoiding this.

And I'm going kick it over to Jim to talk about previously tax revenues and profits.

Jim Lawson: Okay. Thank you, Nikki. All right. So there's a set of rules that where we have deemed inclusions of income onto us shareholders, you know, from their synopses, they effectively create previously tax earnings and profits at the CFC level, such that when they're distributed, they should not be double taxed. And then again, you know, subject to US tax when well for start exchange gain or loss has been distributed up to the US shareholder or a

distributed through a chain, a CFC is not created.

Subpart F a second time on the same underlying kind of earnings. And there's also basis for rules the kind of and those P-TECH rules under section 959 of the code there's also basis rules for are 1961 when you pick up that includes the Viacom, the US Corp and that example gets real basis in its CFC a in an example, but where the deemed dividend or inclusion came out from CFC B up the US Corp, they also creates a kind of notional type of 961 C bases where K takes a basis the CFC B for purposes of reducing subpart F on sales of CFB, CFC shares or distributions of that P type from CFC either CFC.

A but is not in essence a real basis. The there's certain ambiguity in how you overlay with partnership structures. So if you have a U.S. person through a U.S. partnership that then helps CFC with moving to an aggregate approach and pick it up to an inclusion that the partner level as opposed to the partnership while having resident shareholder P type and basis amounts at the partnership level when it was previously tax under subpart F as tax under entity approach, the the US partner would get a basis that the basis of its partnership interest.

But there are some gap there. And at the partnership itself did not necessarily get a basis Bob. But the underlying CFC stop that it that it held there's some ambiguities and how you apply that how you deal with partnership level dispositions and the like are those lower tier CFC stocks where the previous is. Peter is kind of implicated in earlier 2006 proposed regulations around dealing with 312 and 17 Act issues with dealing with these up, up and basis roles.

They were since withdrawn and we were waiting for some time now for new Peter and basis regulations which were promised by the end of the year. And lo and behold that they have enough time. They get over out of my turkey coma and on Friday of last week, the government released their first set of regulations which include dealing with some of those issues with the partnership side and creating some new derivative type bases that the partnership that the partnership has at its lower tier on CFC stock and applies all sets of accounting rules both in and in maintaining open accounts at the CFC level, as well as maintaining at the U.S. shareholder level for all different kinds of adjustments. Change how you determine allocations of ups are subpart F other not section 951. And now you correlate the Pete that that comes up on the shareholder by shareholder basis so that the correct shareholders that actually have the P type basis are the ones who are getting the relief. And this leave it at it's a lot of 300 and I believe a 32 page rate package that we been through still digesting and it creates a lot of complexity here, more scope creep on the way of compliance.

So the need to maintain different accounts and I'm a document report so on and so forth so be on the ready for that what these first set of regulations are not deal with with not it was non-recognition transactions as well certain other items. I'm still requiring additional guidance from the government. However, there was an earlier notice on average at least 2020 for that 16 which dealt with certain covered inbound transactions.

So this would be an example in its simple case here, a U.S. court would have a true basis and it's the FCA shares, whereas the FCA would only have that notional 91 C basis in the CFC each year. So the question that is, well, what would happen if if if the FCA were to liquidate upstream in the U.S. Corp in a Section 332 exchange, that 951 basis would go way up in smoke and that would leave U.S. Corp then with only a notional 91 C basis in its CFC B shares and not real economic basis that it can use to protect against future income on distributions from CFC, B or or capital gain or disposition of the KB shares.

This notice provides relief that one of these covered amount transactions and that in effect the 1960 a basis that U.S. Corp has at CFC a is substituted is actually one A instead of 91 C basis and CFD shares upon that in bound liquidation of CFC A also applies to certain non reorganizations as well. So with that, I believe I'm going to hand this back to Nikki.

Nikki Gram: Yep. Thanks again. I'm going to go through this relatively quickly because section 163 J Group election is not necessarily new. However, with the increased cost of borrowing and increasing interest rates, it might be and have to be just plain tool for some people. It would allow taxpayers to include some or all of guilty and or a subpart F generated by the CFC is when calculating the U.S. HPI for the US limitation as well as aggregate.

The CFC is when calculating in the 163 j limitation. So it may be advantageous for taxpayers that are limited on the U.S. side, but are profitable at the U.S. level, or where there is a CFC with substantial interest expense, but potentially at a loss, they're losing the benefit of that interest expense. But this is a election that can only be revoked in five years and then can only be reelected after another five years.

So it's really important to consider the strategic business plans and forecasting when considering whether or not to make this election and then pass it back to Jim.

Jim Lawson: Real quick here, in the interest of time, effectively, section 245 A, it called provides for a participation exemption for certain U.S. domestic corporations that are 10% or more owners of certain specified Foreign Corp's or qualifying dividends that come up to the U.S. domestic court in the form of like 100% dividends received deduction. The government had issued a memorandum here dealing with in the context of CFC to take distributions dividends offer lower tier assets.

These as whether the CFC themselves at their level qualify for that 100%. The RDA on on the on the basis that there was some in the earlier congressional conference report there are some sentiment there that the CFC should be allowed deduction by reason of being treated as a domestic or for purposes of calculating taxable income for support for GILTI under the Section 952 regulations.

But it's not a domestic corporation, and the statute is is pretty clear requiring a domestic war. So to try to override the statute with some of that legislative history that's in the congressional report might be an uphill challenge. But in the government, of course, is of the view that the CFC not in fact get to use the 100% the RDA for purposes of a business up or that that would otherwise arise. So with that, we'll move on to some global tax developments. And I believe, Matt, you're on.

Matt Damone: Obviously, it is important and it sounds already like the multinational convention has been decided, the case has been worked out even from a U.S. perspective, was one of the initial and largest, you know, objective to the calculation. This is primarily going to affect large U.S. multinational companies only. You know, there's always a risk that it will be you know, it's founded as other kind of BEPS initiatives have been pulled down, kind of down the line to impact more taxpayers across the globe.

But right now, this doesn't seem to be too impactful for some of the largest, you know, global companies. Importantly, though, amount of pillar one, which creates almost the formulary apportionment approach to transfer pricing returns for certain distribution activities. This is a situation where there is no revenue or income limitation. Right. And so we essentially have, you know, a forced out process where the where we have a calculation that uses, you know, essentially the pricing matrix that provides return on sales for certain.

You know, distributors, sales agents, the commissioner of any jurisdiction that provides a fixed profit that needs to be calculated and applied to the entity. There are certain calculations that you can make with respect to operating costs and other different cross tracks that will slightly change the differences for the routine returns. But those amounts are minimal. I think importantly what this does is it creates, you know, risks of stricter adherence to these types of formulary apportionment approaches by foreign tax authorities.

I don't think we'll see the US adopted and push this out through other transactions or other types of transactions which might not be covered under amount B. But I do see, you know, this kind of becoming the default where the idea of actual intercompany and reportable benchmarking might be on the way out for what's considered low risk, fear of limited risk, you know, routine returns.

I think that, you know, the final important thing here because, you know, pillar one of of key parts of amount and b you know to successfully kind of implement pillar one right countries must sign on to the multilateral convention implementing amount A and B, right. In the U.S., we need both Treasury approval and two thirds, a majority to ratify the MLC.

So that would be somewhat difficult currently. I will say though, you know, the US right now is one of the holdouts pushing because of the amount B calculation, the U.S. is looking for it to be mandatory as opposed to, you know, being able to implement it on a voluntary basis. Your high routine return countries, most notably India, although they will never come out and say through the negotiations.

But this is obviously India pushing back because of their very high safe harbor election rates for the profitability, for routine services. Then I'm looking for 3%. And so they're pushing back on this. Most recently, I think Tim Power, who's the Deputy Director for business in and Out act from each and Treasury and is also the co-chair of Inclusive Framework Group.

He said, you know, the text is complete, everything is ready to go. The only thing standing in the way is certain jurisdictions agreeing to the final adoption of them. So what to look out for? There is if it's adopted and then if the U.S. can go ahead and pass pass it on to Nikki.

Nikki Gram: So like, can you Pillar Two's objective is to impose a 15% minimum tax on large multinational group. So multinational groups with greater than €750 million of annual revenues within the last 2 to 4 fiscal years, many EU member states and a handful of others have already implemented Pillar two, effective in January one, 2024, for 22 years. And I ask whether you TBR is being effective in 2025.

It's important to note that this the list of enacting jurisdictions changes quite a bit, you know, on a day to day basis with some jurisdictions adopting part or all of the pillar two charging provisions. So it's important to kind of keep a pulse on that separately. The US has not signed on to Pillar two, but it's starting in 2025.

U.S. income can be subject to globally, depending on jurisdictions in which taxpayers operate. So that's something to be aware of. You know, potentially the new administration can negotiate with the ECB to treat county and gilti as communities and IRAs, but that is to be determined. And lastly, clergy requires that intercompany transactions be price that arm's length cut, as Matt was talking about, with with pillar pillar one, amount B.

So it's important that we get our transfer pricing adjustment into our CVC hours if we're relying on the transitional CBR, TBR Safe Harbor. Because without those adjustments in our qualified statements, we won't have a qualified PCR report and it might hinder our qualification under the safe harbor.

Matt Damone: Yeah. Nikki, the only thing out there is that you want to make sure that you have. You're making adjustments on both sides and getting in the box before you close. Having put the tax differences, our calculations of adjustments for Pillar two done on a unilateral basis, which is increased complications. So how that transfer pricing done earlier, I think we're going to go to the polling question real quick.

We're going to leave this open, even though we're going to keep going just to try and get to the fourth and final polling question as well. So keep looking for that.

Ian Halligan: Matt, I think it's you to cover transfer pricing updates as people are answering the poll question.

Matt Damone: Great. So we're going to get this done in a few seconds. Just a quick bunch of transfer pricing updates. Canada has put out guidance for updates to election to 47. This is basically going to be, you know, more things to look out for here. Is Canada moving away from the single year full range transfer pricing in more alignment with the ECB?

And I would think a simplified approach as well. EU public country by country reporting requirements, it's coming right I think if you are already subject to comes from a country reporting in the U.S. filling out a form any 975. You need to be prepared for EU public country by country reporting find out really some of these other transfer pricing updates here and this is important, especially if you're in the business of sales software as a service.

Australia is trying to fight the world and claim that sales payments are royalties this term for cases that will be decided. Pepsi and Oracle are fighting the battle currently with ATO, but the goal here is to try and push back and make sure that these are treated as service functions. Service staff in the US has come out with specific guidance on this as well.

So again, just pushing this forward, I think we're going to push even on the 3D updates and we're going to get to that final calling question real quick.

Ian Halligan: No matter what's out the gym for the case of the revenue report, because people are answering that.

Jim Lawson: Yeah. So real quickly here, we're pretty much at Tonya's select key cases that came out. One was a Supreme Court case and buckshot in the upper right which overturned the over earlier Chevron doctrine, which is a two step process that if there is any ambiguity in the statute, phase one step one step two, any deference would be given to the government, their interpretation of the statute, as long as it's reasonable or less that we got that case, got rid of the Chevron doctor doctrine of Skidmore deference still exists under cases that have been decided on the heels of overpriced, including Varian Medical, which found that in favor of the taxpayer and invalidity of some regulations that were denied the a 100% draw on certain section 78 gross up amounts proposed is an interesting case in that it defined the time for when harm basically a cause of action and everything. And I'm understanding every suit against the government on Administrative Procedures Act, the normal six year statute. That statute doesn't start until the taxpayer effectively is arm and has then standing to bring suit in corner post that involved some administrative regulations that are that were decades old and they found the poster child at corner post that was initially formed in 2018 on the basis of could it have been harmed before 2018.

So it found that corner post for select successfully challenged that ability of the regulations. Corner Post introduces a lot of other considerations of appeal in the post. Loper Right, as well as when that harm is, you know, occur. And challenging validity of existing regulations that acts is a case that also found for the taxpayer and a lower Tennessee District Court subject to it, subject to appeal on the side in the context of over finding that the statute was clear on its age and are certain regulations that could be potentially under scrutiny as a result of post Loper Price including some of those listed below.

And then finally earlier this year, the Supreme Court ruled in the eyes of the opposition, fatuous constitutional or at least as to the more stated and entertain need the broader 16th Amendment realization requirement. They use an attribution standard to say that the more should pick up the income on an attribution basis. However, there may be more sympathetic taxpayers out there that weren't taxed on or a traditional CSC support regime, and that reserved their due process rights that could potentially be successful before the court.

Farhy was a case that found initially at the tax court level that the government didn't have authority to automatically assess penalties for certain noncompliance under section 38. Filing a 5471 on that decision was later reversed and a D.C. Circuit Court of Appeals there is the IRS is continued to automatically assess penalties. On the heels of the original authority decision, native reinstate a free first bite at the apple for first time offenders and I did taken already into account and for purposes of appeals and has it's a litigation and kind of settling out anecdotally based on some experience that we've had with some of our clients.

The question on the D.C. Circuit reversal is whether the IRS would go backwards more and more automatic assessment and not provide any levels of relief there. However, there's a new case out. And look, I'm announcing incorrectly the fact for once again that the IRS did not have that assessment authority to raise a question, that we could have a dispute between the circuits and potentially being taken up with with the Supreme Court.

Ian Halligan: We need to wrap it now.

Jim Lawson: I think we're going to wrap it up.

Ian Halligan: But thanks. Our thanks for your time. Thanks to Matt. Thanks to Nikki. Thanks for

everyone for attending. If you did submit questions through the Q&A, we will get back to you via email and everybody have a good rest of the event.

Matt Damone: Thanks, guys.