Quarterly tax developments What you need to know about this quarter’s tax developments and related US GAAP accounting implications
December 2017
In this issue:
Tax developments ......................... 2 Other considerations ..................... 4 Things we have our eyes on ........... 6
2 | Quarterly tax developments December 2017
Tax developments Legislation enacted in the fourth quarter Companies are required to account for the effects of changes in tax laws in the period the legislation is enacted. These changes are included in a company’s estimate of its annual effective tax rate in the first interim period that includes the effective date of the rate change, but not earlier than the period that includes the enactment date. If an interim change is significant, temporary differences may need to be estimated as of the enactment date.
Federal, state and territories
Pennsylvania — On 30 October 2017, Pennsylvania enacted legislation eliminating the dollar cap on the use of net operating losses (NOLs), which had been set at $5 million since 2015. The legislation also increased the percentage cap on the use of NOLs to 35% of taxable income from 30% for tax year 2018 and 40% of taxable income for tax year 2019 onward. See Tax Alert 2017-1857, dated 6 November 2017. For discussion of a related court case, see the Other considerations section of this publication.
International
Canada* — On 14 December 2017, Canada enacted legislation allowing companies to claim accelerated depreciation on additional types of clean energy generation property (i.e., certain types of geothermal energy equipment primarily used to generate heat or a combination of heat and electricity). The legislation also allows companies to expense certain costs incurred to determine the extent and quality of a geothermal resource and the cost of all geothermal drilling for electricity and heating projects. These measures apply for property acquired, and expenses incurred, after 21 March 2017.
Additionally, the legislation requires certain expenditures related to the drilling of an oil or gas well resulting in the discovery of a previously unknown petroleum or natural gas reservoir (i.e., a discovery well) to be deducted at a rate of 30% per year on a declining-balance basis instead of being fully deducted in the year incurred. Subject to transitional rules, this change applies to expenses incurred after 2018.
Other changes include:
• Allowing any company that values its derivatives at fair market value for accounting purposes to elect to recognize annually any changes in the value of all its eligible derivatives (as income or loss) for income tax purposes instead of on a realized basis when the derivative is disposed of
• Deferring the realization of any loss on the disposition of a derivative position to the extent of any unrealized gain on an offsetting derivative position (i.e., generally when the offsetting position has not been disposed of and is not subject to mark-to-market taxation), subject to certain exceptions
• Creating a deemed short tax year for a foreign affiliate of a taxpayer when control of the taxpayer is acquired or its interest in the foreign affiliate is reduced, so that any foreign accrual property income for that short tax year is appropriately included in the taxpayer’s income
The enacted legislation also contains numerous tax technical amendments. The amendments affect, among other things, foreign affiliates, foreign merger transactions, nonresident trusts, partnerships and partnership interests, derivative forward agreements, restrictive covenant rules, shareholder benefit rules and negative adjusted cost base rules. Effective dates vary.
France — On 2 December 2017, France enacted legislation imposing a 30% surtax on the corporate income tax of corporations with revenues over €3 billion. A 15% surtax on the corporate income tax would apply to corporations with revenues over €1 billion. The surtax applies for a one-year period ending from 31 December 2017 to 30 December 2018. See Tax Alerts 2017-1829, dated 2 November 2017, and 2017-2107, dated 12 December 2017.
* A Tax Alert has not been published on this development.
Welcome to our December 2017 Quarterly tax developments publication.
We once again describe certain latest tax developments previously summarized in Tax Alerts or other EY publications or identified by EY tax professionals or EY foreign member firms. These developments may affect your tax provision or estimated annual effective tax rate.
We compile this information because we recognize that, for many companies, the most challenging aspect of accounting for income taxes is identifying changes in tax law and other events when they occur so the accounting can be reflected in the appropriate period. However, this publication is not a comprehensive list of all changes in tax law and other events that may affect income tax accounting.
This edition covers certain enacted and effective tax legislation, as well as regulatory developments, legislative proposals and other items through 14 December 2017, except as noted. Due to legislative developments around US tax reform, however, coverage of non-US legislative proposals is more limited this quarter.
We list EY publications that you can access through our website, EY Tax News Update, if you are registered. To register, please click here.
See our previous editions for additional tax developments.
3 | Quarterly tax developments December 2017
Poland — On 27 November 2017, Poland enacted legislation reforming its corporate income tax regime. Key changes include:
• Limiting deductions for certain financing costs and payments related to intangible property (e.g., royalties)
• Modifying the controlled foreign corporation (CFC) rules so more foreign subsidiaries qualify as CFCs
• Disallowing deductibility of financing costs linked to leveraged buyouts
• Limiting the deductibility of certain intercompany charges (e.g., market research, advertising services, data processing, insurance) unless a company enters into an advanced pricing agreement with the Government
• Eliminating the use of capital gains and losses to offset other types of income and losses
The changes are effective 1 January 2018. See Tax Alerts 2017-1625, dated 4 October 2017, 2017-1767, dated 24 October 2017, and 2017-2000, dated 27 November 2017.
Turkey — On 5 December 2017, Turkey enacted legislation increasing its corporate tax rate for tax years 2018–2020 to 22% from 20%. The legislation also reduces the corporate tax exemption rate for gains from sales of certain immoveable property to 50% from 75%. The changes are effective upon enactment. See Tax Alert 2017-2054, dated 5 December 2017.
Legislation effective in the fourth quarter Treaty changes Tax treaties are agreements between countries that typically address withholding tax rates or exemptions on dividends, interest and royalties paid in multiple jurisdictions. Exceptions may apply based on the tax treaty (e.g., reduced rates may apply to certain categories of investors, capital gains from immovable property or property-rich companies may be taxable). The following tax treaty change was effective in the fourth quarter.
Countries involved Summary of changes
Indonesia Netherlands Provides a general withholding tax rate of 15% on dividends.
4 | Quarterly tax developments December 2017
Other considerations Federal, state and territories
New Jersey — The state Tax Court held that New Jersey’s corporate business tax applied to an out-of-state corporation that was a limited partner in two New Jersey homebuilding businesses. The Court reasoned that the corporation was so integrated with the partnerships and their general partners that it essentially took part in the partnerships’ businesses. See Tax Alert 2017-1985, dated 22 November 2017.
Minnesota — In response to a recent Minnesota Supreme Court decision, the Government announced that corporations must now include income, losses and deductions from their foreign disregarded entities in the regarded parent entity’s returns. The announcement reverses the Government’s prior policy of excluding foreign disregarded entities from those returns. See the State and Local Tax Weekly for 20 October 2017.
Pennsylvania — The state Supreme Court held that Pennsylvania’s dollar cap on NOL deductions, as applied to one company in 2007, violated the uniformity clause in the state’s Constitution. The Court did not address the constitutionality of the state’s percentage cap on NOL deductions. See Tax Alert 2017-1763, dated 24 October 2017.
South Carolina — The state Court of Appeals agreed with the Administrative Law Court that South Carolina income tax applied to 100% of the fees that a multistate company received from South Carolina customers for access to television programming channels. See Tax Alert 2017-1881, dated 8 November 2017.
Tax amnesties This table shows the tax amnesties that were announced or went into effect in the fourth quarter of 2017.
Jurisdiction Amnesty period Taxes covered Reference
Rhode Island 1 December 2017 through 15 February 2018
Taxes, including corporate income taxes, due for tax periods ending on or before 31 December 2016
Tax Alert 2017-2025, dated 30 November 2017
El Salvador 27 October 2017 through 27 January 2018
Taxes, including corporate income taxes, due before 27 October 2017
Tax Alert 2017-1835, dated 3 November 2017
International
Brazil — In a provisional measure, the Government changed the tax treatment of certain investment funds to eliminate taxpayers’ ability to defer recognition of fund-related income. The provisional measure is effective 1 January 2018 but must be converted into law within 60/120 days of 30 October 2017 or it will expire. See Tax Alert 2017-1817, dated 31 October 2017.
Canada —The Federal Court of Appeal held that Canada’s general anti-avoidance rules (GAAR) did not apply to a series of cross-border transactions undertaken by a UK acquiring firm immediately after its arm’s-length indirect acquisition of a Canadian target company, even though the transactions allowed the target’s indirect US parent to extract nearly $900 million tax-free from the target in the form of loans and a return on capital. The Court reasoned that GAAR did not apply in this case because the UK firm indirectly acquired the target at arm’s length, and the tax law at the time did not prevent the tax-free removal of any earnings surplus of the Canadian target company by an arm’s-length purchaser. Subsequent legislative amendments (enacted in 2016) now prevent this type of tax planning. See Tax Alert 2017-1748, dated 20 October 2017.
China — In a public notice, the Government listed additional research and development expenses that may be deducted at 150% of their actual cost. See Tax Alert 2017-2198, dated 20 November 2017.
Court decisions, regulations issued by tax authorities and other events may constitute new information that could trigger a change in judgment in recognition, derecognition or measurement of a tax position. These events also may affect your current or deferred tax accounting.
5 | Quarterly tax developments December 2017
Denmark — The Tax Board ruled that a German project management company would create a permanent establishment (PE) in Denmark by having some employees work from the temporary Danish office of its German client for 15 months, even though the majority of work on the three-year contract between the companies would be performed in Germany. See Tax Alert 2017-1684, dated 12 October 2017.
France — The Constitutional Council held that France’s 3% tax on dividend distributions violated the French Constitution. See Tax Alert 2017-1675, dated 11 October 2017.
Germany — In final guidance, the Government outlined the circumstances under which German withholding tax would or would not apply to cross-border payments for the use of software and databases. See Tax Alert 2017-1828, dated 2 November 2017.
Hong Kong — In a Practice Note, the Government explained the requirements that aircraft financing and leasing businesses must meet to elect to pay a profits tax rate of 8.25% instead of 16.5%. See Tax Alert 2017-1902, 10 November 2017.
India — The Apex Court affirmed a lower court ruling that two US companies did not create a PE in India under the India-US income tax treaty by outsourcing certain back office and support services to an Indian subsidiary. See Tax Alert 2017-1955, dated 17 November 2017.
Italy — In a decree, the Government amended its patent box rules so they align with the recommendations of the Organisation for Economic Co-operation and Development (OECD) against base erosion and profit shifting (BEPS). Under the new rules, companies may no longer elect to exempt trademark-related income from the corporate income tax and the regional tax on production activities (known as IRAP). For companies that already elected to exempt a portion of this income, the election remains valid until the earlier of five years or 30 June 2021. See Tax Alert 2017-2100, 12 December 2017.
Peru — In a notice, the Government announced that the maximum withholding rates for dividends and certain types of interest under the Peru-Mexico income tax treaty decreased to 10% from 15%. See Tax Alert 2017-2007, dated 29 November 2017.
Poland — In a letter, the Government identified the circumstances under which it would deny exemptions from dividend withholding tax based on application of its general anti-avoidance rule. See Tax Alert 2017-1867, dated 7 November 2017.
6 | Quarterly tax developments December 2017
Things we have our eyes on Federal, state and territories Tax reform. Congress approved the Tax Cuts and Jobs Act, which now awaits presidential signature. Key business provisions of the bill include:
• Permanently reducing the 35% corporate income tax rate to 21%, beginning in 2018
• Repealing the corporate alternative minimum tax (AMT), beginning in 2018
• Imposing a one-time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets
• Establishing a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign corporations to 10% US corporate shareholders
• Imposing new anti-deferral rules so that the imputed intangible returns of CFCs are subject to a minimum rate of US and/or foreign tax
• Imposing a new base erosion minimum tax that would be calculated by reference to all deductible payments made to a foreign affiliate for the year and apply to certain US corporations with average annual gross receipts of $500 million or more over three years
• Creating an incentive for US companies to sell goods and provide services abroad by effectively taxing income from those activities at a reduced rate
• Limiting deductions for net interest expense to 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes thereafter, but excluding a proposed limitation based on comparative debt levels between US and non-US affiliates
• Allowing businesses to expense the cost of certain new and used qualified property placed in service after 27 September 2017 and before 1 January 2027, but gradually phasing out the amount expensed from 100% in 2022 to 0% in 2027
• Repealing the Section 199 domestic production deduction, beginning in 2018
• Limiting NOL usage to 80% of taxable income for losses arising in tax years beginning after 2017, eliminating NOL carrybacks and allowing indefinite carryforwards for NOLs generated after 31 December 2017
• Expanding the $1 million deduction limit on compensation paid to certain top executives of publicly traded companies to include compensation paid to the CFO, as well as deferred compensation paid to individuals who previously held those top-level positions (does not apply to remuneration under a written binding contract that was in effect on 2 November 2017 and was not materially modified thereafter)
See Tax Alert 2017-2130, dated 16 December 2017. For discussion of the bill’s income tax accounting considerations, see Tax Alert 2017-2134, dated 18 December 2017, and our Technical Line, Accounting for the effects of the Tax Cuts and Jobs Act.
Burden-reduction reforms. The Government announced that it will delay the effective date of temporary and final regulations under Section 987 by one year. The regulations, which will take effect 1 January 2019 for calendar-year taxpayers, address income and currency gains or losses with respect to a Section 987 qualified business unit, as well as the recognition and deferral of Section 987 gains or losses. See Tax Alert 2017-1621, dated 3 October 2017.
Additionally, the Government released its report detailing actions that it plans to take to “reduce the burden” of tax regulations identified in July 2017 under an executive order. Those actions include:
• Retaining the distribution rules in the Section 385 regulations on treatment of certain interests in corporations as stock or indebtedness
• Replacing the current documentation rules in the Section 385 regulations with “streamlined documentation rules”
• Considering substantial revisions to the final Section 987 regulations
National, state and local governments continue to seek to increase their revenues. Companies should continue to monitor developments in this area. Some of these potential tax law changes are summarized here.
7 | Quarterly tax developments December 2017
• Considering substantial revisions to the final regulations under Section 367 that would eliminate the foreign goodwill exception and limit the Section 367(a)(3) active trade or business exception to certain tangible property and financial assets (T.D. 9803; see also Tax Alert 2016-2193)
• Considering substantial revisions to the temporary Section 337(d) regulations on certain property transfers to regulated investment companies and real estate investment trusts
See Tax Alerts 2017-1627, dated 4 October 2017, and 2017-1678, dated 11 October 2017, and 2017-1705, dated 13 October 2017.
Partnership audit regime* — The Government proposed additional regulations on the new partnership audit regime enacted by the Bipartisan Budget Act of 2015. The regulations would affect tier partnerships by allowing a tier structure to “push out” an audit adjustment to the ultimate taxpayer partner, rather than paying the imputed underpayment at the partnership level.
International Argentina — The Government proposed lowering the 35% corporate income tax rate to 30% for tax years 2018 and 2019 and to 25% from tax year 2020 onward. Other proposals include:
• Imposing a 7% withholding tax on certain dividends paid to nonresidents in tax years 2018 and 2019, which would increase to 13% from tax year 2020 onward
• Repealing the “equalization tax” (i.e., the 35% withholding tax on dividends distributed in excess of accumulated taxable income), beginning in 2018
• Replacing the current 2:1 debt-to-equity ratio with an interest deduction limit equal to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) or a certain amount to be determined by the Executive Power, whichever is higher
• Establishing a PE definition that would generally follow the definition used in Argentina’s tax treaties
See Tax Alerts 2017-1825, dated 2 November 2017, 2017-2120, dated 14 December 2017.
Australia — In accordance with the recommendations of the OECD against BEPS, the Government proposed new rules to tax “hybrid mismatch” arrangements (i.e., cross-border arrangements that benefit from differences between two countries in the tax treatment of certain financial instruments and entities). See Tax Alert 2017-2009, dated 29 November 2017.
European Union — The European Commission is investigating whether the United Kingdom violated EU state aid rules by exempting certain financing income from tax under the UK’s CFC rules. See Tax Alerts 2017-1812, dated 31 October 2017, and 2017-1966, dated 20 November 2017.
An Advocate General of the European Court of Justice held that EU law required the Netherlands to extend certain benefits available to members of a Dutch fiscal unity (i.e., a consolidated group that is open to certain Dutch resident group companies only) to Dutch companies that do not have access to those benefits because they cannot form a fiscal unity with their foreign group companies. See Tax Alert 2017-1798, dated 27 October 2017.
France — The Government proposed denying favorable tax treatment to mergers and related operations that do not have a valid business purpose. Other proposals include:
• Relaxing the current requirements that must be met for certain demergers and asset contributions to qualify for favorable tax treatment
• Limiting the instances in which French companies must receive an advance ruling from French tax authorities authorizing a restructuring involving foreign companies
• Relaxing the current requirements that must be met for spin-offs to qualify for favorable tax treatment
• Denying deductions for foreign withholding taxes imposed under an income tax treaty
See Tax Alert 2017-1989, dated 22 November 2017.
* A Tax Alert has not been published on this development.
8 | Quarterly tax developments December 2017
Netherlands — In a policy paper, the Government proposed lowering the 25% standard corporate income tax rate to 24% in 2019, 22.5% in 2020 and 21% from 2021 onward. Additionally, the Government proposed eliminating the 15% withholding tax on dividends. Other changes include:
• Imposing withholding tax on interest and royalties paid by Dutch companies to related parties in low-tax jurisdictions
• Limiting interest expense deductions to the greater of 30% of a taxpayer’s EBITDA or €1 million
• Reducing the number of years companies may carry tax losses forward to six from nine
• Increasing the tax rate for profits from intellectual property to 7% from 5%
See Tax Alert 2017-1676, dated 11 October 2017.
Norway — The Government proposed lowering the corporate income tax rate to 23% from 24% beginning in 2018. Other changes include:
• Increasing the special tax on petroleum income to 55% from 54% for companies that carry out petroleum-related activities
• Limiting deductions for tax losses incurred by Norwegian companies on dispositions of shares in a foreign subsidiary if an income tax treaty between Norway and the subsidiary’s country of residence exempts dividend income from taxation (effective from 12 October 2017)
• Limiting the amount of interest expense that a partnership with tax losses can carry forward (effective from 2017)
• Amending the group contribution rules to allow Norwegian companies to deduct profits contributed to certain Norwegian branches of related companies located in the European Economic Area
• Amending the definition of financial institutions to exclude certain companies from the interest expense limitation (effective from 2018)
See Tax Alert 2017-1734, dated 19 October 2017.
OECD — The OECD approved updates to its model income tax treaty that would incorporate, among other things, treaty-related recommendations from its BEPS project. See Tax Alert 2017-2039, dated 1 December 2017.
United Kingdom — The Government proposed broadening the circumstances under which royalties paid to nonresidents are subject to tax. It also proposed taxing nonresidents on gains from the sale of immovable property. Other proposals include:
• Restricting a UK company’s foreign tax credits or deductions if it lowered its foreign tax liability by offsetting PE-related losses in the foreign jurisdiction against non-PE-related profits (effective 22 November 2017)
• Requiring related parties in a licensing agreement for intangible fixed assets to value the assets at fair market value (effective for transactions occurring on or after 22 November 2017)
• Allowing a UK company to continue deferring tax on certain transactions when the interposition of a new holding company between the UK company and a foreign subsidiary would end the deferral
• Making technical amendments to the corporate interest restriction rules
See Tax Alerts 2017-1988, dated 22 November 2017, 2017-2050, dated 5 December 2017, 2017-2053, 5 December 2017.
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