U.S. Tax Laws: A Review Of 2018 And A Look Ahead To 2019

REVIEW OF U.S. TAX DEVELOPMENTS IN 2018

U.S. taxpayers will remember 2018 as the year spent coming to terms with the tax reform legislation enacted at the end of 2017, known as the Tax Cuts and Jobs Act (TCJA). The TCJA included a surprisingly large number of new tax rules that have substantial consequences for U.S. and foreign individuals and multinational enterprises. It is not an exaggeration to say that tax reform in the United States changed the playing field in dramatic ways that arguably made the United States more "tax-competitive" than ever before. This tax competitiveness comes at the cost of new or expanded anti-base-erosion rules and overall heightened complexity, which characterizes most of the regulations and other interpretive guidance issued under the TCJA in 2018.

Among the more important changes introduced under the TCJA are the following: the maximum corporate income tax rate was reduced immediately (and on its face, permanently) to 21% (plus deductible state and city tax); temporary write-offs were provided for equipment purchases; and a wide variety of provisions were added to reduce opportunities for transferring assets offshore, deferring immediate taxation of offshore earnings, sheltering income through interest deductions and engaging in other worldwide tax-saving strategies. The new legislation increased incentives for U.S. production targeted to foreign markets1 and reduced incentives for producing goods overseas.

While the U.S. initially appeared reluctant to embrace the OECD's recommendations to address base erosion and profit shifting (BEPS), the TCJA actually includes a number of provisions that were advocated in the OECD's BEPS Reports, including stronger anti-earnings-stripping rules and anti-hybrid rules, which mainly affect inbound investment, and a harsh minimum tax on large corporations making payments to related foreign parties. Tax reform also assured that non-U.S. investors would be subject to U.S. tax on the disposition of partnership interests that generate effectively connected income (ECI) and adopted rules that at least temporarily increased exclusions from U.S. gift and estate taxes for U.S. citizens and residents.2

Due to the vast scale of change in U.S. tax law, 2018 was expected to bring a flood of interpretative guidance from the IRS and Treasury Department. Many of those expectations were met when the IRS released Notices and Proposed Regulations in abundance, but mostly near the end of the year. Some of that guidance is described below.

A brief review of Tax Developments in 2018 precedes our outlook for 2019.

FEDERAL TAX LEGISLATION

While important technical corrections were expected to be made to the TCJA, they were not enacted in 2018. The Joint Committee on Taxation's General Explanation of the TCJA, published in December of that year, includes reference to many areas in which technical corrections may be useful or necessary.

FEDERAL ADMINISTRATIVE DEVELOPMENTS

  1. Proposed Regulations Addressing Tax Reform

    Proposed regulations were published in 2018 on a number of the more complex provisions in the TCJA, including rules about mandatory repatriation of accumulated offshore earnings, inclusions under the new "global intangible low-taxed income" (GILTI) regime, anti-earnings-stripping rules, the new corporate minimum tax known as the "base erosion anti-abuse tax" (BEAT), and anti-hybrid rules. Most of these efforts have been impressive in size and some even include taxpayer-favourable approaches on a number of issues. In some areas, however, the IRS has indicated in the preambles to the proposed regulations that administrative burdens on taxpayers will be substantial, and that certain relief sought by taxpayers was inconsistent with the legislation as enacted (so no relief could be provided absent further legislation).

    The following proposed regulations are among the most significant issued in 2018:

    Earnings-Stripping Rules. The TCJA replaced a former provision of the Internal Revenue Code of 1986, as amended (Code), that limited only interest deductions on related party indebtedness with a broad new limitation on virtually all net business interest expense. Under the rewritten section 163(j), deductions for covered interest are limited to 30% of the taxpayer's adjusted taxable income, which generally is similar to a financial metric commonly known as EBITDA.3 Exceptions are available for certain utilities, real estate, energy and motor vehicle businesses.4 Complex, strict rules are applied to indebtedness owed by (and business conducted through) a partnership (the proposed regulations include a 10-step computational process and require tracking of a number of separate accounts for each partnership interest). The recently released proposed regulations would apply the new limitation widely to interest on financing transactions, implement Code rules to coordinate the new limitation with rules applicable under the BEAT and through partnerships, and provide allocation methods for businesses that may be only partially exempt. According...

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