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Sean Foley |
Landon McGrew |
If enacted by Congress, the international tax proposals included in the Budget would raise an estimated $276 billion over the next 10 years. The President's Budget includes a number of international tax proposals that were included in last year's Budget and some significant new international tax proposals, especially in the outbound context. If enacted, the proposed effective date for items in the FY2015 budget is for taxable years beginning after December 31 2014. A brief summary of this year's new international tax proposals in the outbound context is described below.
Create a new category of Subpart F income for transactions involving digital goods or services
Under this proposal, a new category of subpart F income called foreign base company digital income (FBCDI) would be created. In general, FBCDI would include income of a controlled foreign corporation (CFC) from the lease or sale of a digital copyrighted article or from the provision of a digital service in cases where the CFC (i) uses intangible property developed by a related party to produce the income and (ii) does not make a substantial contribution to the development of the property or services that give rise to the income. The provision would include an exception for cases where the CFC earns income directly from customers located in the CFC's country of incorporation. If enacted, this proposal would raise an estimated $11.66 billion over the next 10 years.
Prevent avoidance of foreign base company sales income through manufacturing services arrangements
Under this proposal, foreign base company sales income (FBCSI) would be expanded to include income of a CFC from the sale of property manufactured on behalf of the CFC by a related person. The existing exceptions to FBCSI would apply to this type of arrangement. If enacted, this proposal would raise an estimated $24.608 billion over the next 10 years.
Restrict the use of hybrid arrangements that create stateless income
This proposal would deny deductions for interest and royalty payments made to related parties under certain circumstances involving hybrid arrangements. As an example, the proposal states that a US taxpayer would be denied a deduction for interest or royalty payments made to a foreign related party where either (i) as a result of a hybrid arrangement, there is no income inclusion in the foreign jurisdiction or (ii) the hybrid arrangement would permit the taxpayer to claim an additional deduction for the payment in another jurisdiction. If enacted, this proposal would raise an estimated $937 million over the next 10 years.
Limit the application of exceptions under subpart F for certain transactions involving hybrid entities
Under this proposal, the section 954(c)(3) same-country exception rule and 954(c)(6) CFC look-through rule would not apply to payments made to a foreign reverse hybrid held directly by a US taxpayer when such amounts are treated as deductible payments received from foreign related persons. If enacted, this proposal would raise an estimated $1.336 billion over the next 10 years.
Limit the ability of domestic entities to expatriate
Under this proposal, the definition of an inversion transaction would be broadened by replacing the 80% test in section 7874 with a greater-than-50% test, and eliminating the 60% test. The proposal would also provide, in part, that an inversion will occur, regardless of the level of shareholder continuity, if (i) the affiliated group that includes the foreign corporation has substantial business activities in the US and (ii) the foreign corporation is primarily managed and controlled in the US. If enacted, this proposal would raise an estimated $17.004 billion over the next 10 years.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
Sean Foley (sffoley@kpmg.com), Washington, DC and Landon McGrew (lmcgrew@kpmg.com), McLean, VA
KPMG
Tel: +1 202 533 5588
Fax: +1 202 315 3087
Website: www.us.kpmg.com
