As we look back on 2020, economic changes and several regulatory developments have impacted how multinational companies are planning for taxes today. Below, we cover key changes introduced in 2020, potential impacts, and insight into what’s on the horizon for 2021.
Tax Strategies for Multinational Companies
Throughout 2020, tax planning strategies that focused on reducing expenses and maintaining cash flow were front and center—largely due to COVID-19’s many impacts on multinational companies. Taxpayers impacted by changes in the economic environment should consider how these strategies may be beneficial to their business.
The following articles highlight some of these tax-planning strategies:
Export Incentive Tax Benefits
Export incentives continue to provide benefits to many US business owners, especially those that manufacture in the United States and sell outside the country. Final regulations related to the deduction of foreign-derived intangible income (FDII) are generally more favorable to taxpayers, allowing a greater number of US businesses to benefit from these incentives.
GILTI High-Tax Exclusion
Final regulations issued for the global intangible low-taxed income (GILTI) high-tax exclusion provide a potential income deferral opportunity for US businesses that have foreign subsidiaries. Under these rules, US shareholders may elect to exclude any item of a controlled foreign corporation’s (CFC) income subject to a foreign effective rate greater than 18.9% from their GILTI computation.
Mexico Tax Reform
Mexico approved a sweeping tax reform package intended to combat based erosion and profit-shifting arrangements. These changes impact businesses with cross-border transactions, Maquiladora arrangements, Mexican independent agents, and sellers of digital goods and services to Mexican buyers.
CFC Interest Expense Limitation
Final and new proposed regulations were issued for computing the business-interest deduction limitation. These proposed regulations substantially revise a previous set of proposed regulations issued in 2018, including the interest capitalization rules for controlled foreign corporations (CFC). Taxpayers subject to the interest expense limitation should consider how the changes in these regulations could alter their current tax positions.
Cryptocurrency Tax Update
The IRS released long-anticipated cryptocurrency transaction characterization and reporting guidance in the form of Revenue Ruling 2019-24 and a Q&A-style guide.
As we look to 2021, there are a few key areas that could impact multinational taxpayers.
Guidance on Previously Taxed Earnings and Profit
Long-awaited regulations on previously taxed earnings and profits (PTEP) have been listed on the IRS issued 2020–2021 Priority Guidance Plan.
In December 2018, the IRS and Treasury released Notice 2019-1, addressing the ordering rules for PTEP. The notice stated the Treasury Department and IRS intended to withdraw existing 2006 proposed regulations and issue new proposed regulations. Two years later, we’re still waiting on these new regulations.
Ordering rules for PTEP are currently based on Notice 2019-1, which outlines maintenance of separate PTEP accounts, but falls short of providing guidance on basis issues related to GILTI inclusions. The notice also recognizes the need for simplifying these rules. Both are expected to be addressed in the new proposed regulations.
Biden Administration and Its Tax Proposals
Many of the changes we expect from the Biden Administration’s tax proposals are largely dependent on whether there’s a Republican- or Democrat-controlled Senate. There are two Senate positions still in play in the Georgia run-off elections in January.
Currently, Republicans have 50 seats and Democrats have 48 seats. Democrats would need to pick up the two remaining seats to have control in the Senate. We expect to see more of the Biden Administration’s plans unfold in 2021 after knowing the results of the Georgia run-off election.
Learn more about the Biden Administration’s tax proposals in our article.
Foreign Tax Credit Regulations
On September 29, 2020, the IRS and US Treasury released new proposed foreign tax credit regulations.
The 2020 proposed regulations introduce several changes, including the following:
- Modify the definition of a creditable foreign tax and taxes in lieu of income tax
- Change the time at which foreign taxes accrue and can be claimed as a credit
- Provide guidance on the allocation and appointment of certain deductions
- Supply transition rules related to the impact on loss accounts of the net operating loss (NOL) carrybacks allowed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act
The proposed regulations were published in the Federal Register on November 12, 2020. The IRS is asking for comments within 90 days after that date.
Final regulations on this topic could be released in 2021, but it isn’t yet known how the final regulations would differ from what’s currently proposed.
We’re Here to Help
2020 has been a year of unprecedented changes, and more are likely on the horizon for 2021. To learn more about these changes and what you or your company can do to prepare, contact your Moss Adams professional.