U.S. Tax Laws: A Review Of 2019 And A Look Ahead To 2020

Review of U.S. Tax Developments in 2019

In 2019, the U.S. tax world continued to be primarily concerned with developing guidance under the monumental Tax Cuts and Jobs Act (TCJA), which was enacted at the end of 2017. Major regulatory projects were proposed beginning in 2018, including extensive rules on the global intangible low-taxed income (GILTI) regime, the revised anti-earnings stripping rules of section 163(j),1 the base erosion anti-abuse tax (BEAT) and the anti-hybrid rules. This work continued throughout 2019, with the Internal Revenue Service (IRS) finalizing many of the regulations that were proposed in 2019 and proposing several additional regulatory projects.

Even after two years of frenzied activity, the IRS has yet to issue several major sets of regulations under the TCJA. The IRS has stated that one of its main goals for 2020 is to finish developing guidance under the TCJA. Accordingly, U.S. tax practitioners expect to see significant progress in this area throughout 2020.

In the international context, 2019 was a year in which some countries, frustrated by the glacial pace of the efforts of the Organisation for Economic Co-operation and Development (OECD) to combat international tax avoidance, took unilateral measures to combat base erosion by large companies such as Google and Amazon. France, in particular, attracted attention for instituting a "digital services tax," which is a tax on revenues generated by a company from French consumers with respect to the provision of certain digital services.2 The United States views these new taxes as targeted at U.S. companies and has proposed retaliating against France by adding tariffs on French goods.

A brief review of tax developments in 2019 precedes our outlook for 2020.

Federal Tax Legislation

No significant federal tax legislation was enacted in 2019, even though tax practitioners widely recognize the need for a technical corrections bill to address certain drafting problems with the TCJA.

Federal Administrative Developments

The IRS and the Treasury Department continued throughout 2019 to work on guidance under many aspects of the TCJA.

1. Finalized Regulations Under the TCJA

   The IRS was successful at finalizing several important regulatory projects. Most of these regulations were finalized with only minor changes to the proposed versions. Finalized regulations issued in 2019 under the TCJA included regulations on GILTI, section 199A, and the BEAT.

2. Additional Proposed Regulations Under the TCJA

   In addition, the IRS proposed several new sets of regulations, some of which would be taxpayer-favourable, including the following:

   Withholding on Transfer of an Interest in an ECI-Generating Partnership. Before the TCJA, it was unclear under U.S. federal tax law whether substantive tax applied to a foreign person's transfer of an interest in a partnership (or other entity classified as a partnership for U.S. federal tax purposes) that generated income that was (in whole or in part) effectively connected with a U.S. trade or business (ECI). The TCJA resolved the issue, and now gain on such a transfer is treated as ECI and the transferee of an interest in an ECI-generating partnership is required to withhold 10% of the purchase price for the interest. This rule is known as "1446(f) withholding."

   In 2018, the IRS provided temporary guidance on the new withholding tax in the form of two notices. In 2019, the IRS issued proposed regulations based partly on those notices, but with some significant differences. For example, under the notices, certain exceptions from 1446(f) withholding would have been available if the amount of ECI from a hypothetical sale of the partnership's assets was less than 25% of the total gain or if less than 25% of the transferor partner's share of the underlying partnership's income was ECI. The proposed regulations reduced the threshold for these exceptions from 25% to 10%.

   Other provisions under these proposed regulations relate to an exception from 1446(f) withholding for taxpayers entitled to tax treaty benefits and procedures to be used for taxpayers to qualify for the exceptions from 1446(f) withholding.

   GILTI. The TCJA created a new tax regime for GILTI, which requires a taxpayer to recognize certain income of a CFC in excess of a specified rate of return on the CFC's foreign assets, even if such income is not distributed to the taxpayer. In addition to finalizing regulations on GILTI that were proposed in 2018, the IRS proposed new regulations relating...