IRS Grants Relief and Safe Harbors for Certain Foreign Stock Ownership!

On October 2, 2019 we posted, IRS Grants Relief for Certain Foreign Stock Ownership! where we discussed new regulations from the Internal Revenue Service provide relief to some U.S. taxpayers who own stock in certain foreign corporations. Rev. Proc. 2019-40 and the proposed regulations limit the inquiries required by U.S. taxpayers to determine whether certain foreign businesses are controlled foreign corporations.

The Revenue Procedure limits the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations (“CFCs”). The Revenue Procedure also allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. It also provides penalty relief to taxpayers in the specified circumstances. 

 

Now according to Law360, this recent guidance from the Internal Revenue Service creates safe harbors for U.S. companies that unexpectedly owned foreign affiliates after Congress passed its tax overhaul, but regulatory authority is still limited in compensating for anti-abuse legislation that seemingly went too far.

The newly issued revenue procedure essentially provides breathing room for companies that found themselves with a CFC solely due to the repeal of Section 958(b)(4), limiting the information they’re required to obtain when filing tax returns. Specialists said the U.S. Department of the Treasury was stuck between its desire to help companies with unexpected CFCs and the need to acknowledge the law, but there’s disagreement over whether the middle ground where the guidance landed is fair.

Treasury’s approach wouldn’t allow companies to ignore the law, but it also wouldn’t saddle them with the full impact of the legislative change, according to Pat Brown, an international tax policy leader at PwC.

The legislative history of the Section 958(b)(4) repeal suggests Congress had only intended to target the perceived abuse of current tax rules. For example, a December 2018 report from the Joint Committee on Taxation cited situations where a foreign company parent takes at least 50% of a CFC’s stock to “decontrol” the entity and convert it to a non-CFC.

Steven Hadjilogiou, a tax partner at McDermott Will & Emery LLP, had no doubt the repeal went too far.

 

He said the Kind of Abuse Outlined in the JCT Report Mostly Related to Planning Techniques that Closely Held Companies used to Avoid CFC Status in Specific Scenarios.

 

But without an actual change to the law, Treasury had to work within its authority to provide relief to U.S. shareholders, which can include people, partnerships and companies, that found themselves with unexpected CFCs.

The proposed regulations aren’t undoing the Section 958(b)(4) repeal, but turning off regulations that cross-reference it in some cases, according to Seth Green, principal and co-leader of the international tax group in KPMG LLP's national tax practice.

The revenue procedure also attempts to provide relief by creating safe harbors for determining whether an offshore company is a CFC due to the repeal, a task that can be challenging for those dealing with opaque foreign affiliates.

Specifically, the guidance “limits inquiries” required by U.S. shareholders to determine whether certain foreign corporations are CFCs, according to the IRS.

The revenue procedure also said the IRS will accept a determination that such a company isn’t a CFC if the shareholder lacks “actual knowledge, statements received and/or reliable publicly available information” that’s enough to determine if ownership requirements are met.

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