2013 - Issue 51—It’s the "same as last year" for me, the head of global tax, with the imminent expiration of the Subpart F Look-Through Rule (IRC Section 954(c)(6)). As in past years, this helpful law will likely expire but could then be extended retroactively in the middle of 2014. This is a big pain in the neck for me, mostly because I have to worry about accounting for income taxes as though the law really expires, and then later I might need to redo that accounting as if the law had stayed in place. It’s a terrible time of year to pile more onto my to-do list. The good news is that I’ve been through this before, so it’s not new to me.
Luckily, I wrote this all down the last time it happened. Here is my checklist for what I need to do. Most of this, fortunately, can be done after year-end, but maybe I should start now in case any last-minute planning can be done before year-end.
(1) What is my exposure?
Going into 2014 not knowing whether the benefit from the Look-Through Rule will be available creates complications when dealing with the first-quarter tax provision. Foreign transactions that were not taxable in prior years may now trigger U.S. taxation. To determine the possible tax exposure going into 2014, the following steps should be taken:
- Identify the yearly recurring intercompany transactions that may generate Subpart F income absent the Look-Through Rule.
- Determine any non-recurring special transactions that I plan to implement in 2014 that may trigger Subpart F.
- Analyze the applicability of any other exceptions that may be available (i.e., same country, high tax, de minimis, lack of earnings & profits, etc.).
- Calculate the potential Subpart F inclusion in 2014.
(2) Do I have a firm enough grasp on my foreign tax credit profile?
Since the benefit of the Look-Through Rule has been available for several years, calculating the amount of foreign tax credits associated with Subpart F inclusions may not have been necessary. It is likely that earnings & profits and tax pools have not been kept current. But by the first quarter of 2014, tax provision and financial reporting require an understanding of the available foreign tax credits and the ability to use them. To properly prepare for the foreign tax credit aspect of the first-quarter provision and financial reporting obligations, the following steps should be considered:
- Update my earnings & profits and tax pool workpapers.
- Analyze the amount of foreign taxes associated with any potential 2014 Subpart F inclusions.
- Identify my foreign tax credit carryovers.
- Determine whether I am in an overall foreign-source income or loss position.
- Determine whether there will be sufficient foreign-source income to use my foreign tax credits in 2014.
- Consider the impact of net operating losses, if applicable.
(3) Should I make any prepayments?
Without the Subpart F Look-Through Rule, using dividends to move cash among foreign businesses may no longer be nontaxable. By making anticipated 2014 dividends in 2013, potential Subpart F inclusions can be avoided. This can be done right now, and the Subpart F financial and accounting impact can be eliminated. Consider the following steps to understand the ability to mobilize cash throughout the foreign structure before it becomes more costly:
- Identify anticipated 2014 dividend payments.
- Talk to the finance department to get additional 2014 cash needs and flows.
- Determine cash balances available to mobilize prior to year-end.
- Understand any associated legal, accounting, treasury or local country issues.
- Consider other types of advance payments.
(4) Should I restructure my intercompany loans?
As is the case with dividends, proactive steps can be taken to eliminate or reduce Subpart F inclusions related to intercompany interest payments. Now is the time to analyze and restructure debt, such that these interest payments can be reduced or eliminated entirely. If 2014 intercompany interest payments prove to be costly, consider the following:
- Determine which intercompany accounts will trigger Subpart F from interest payments and accruals.
- Identify options to pay down, unwind or forgive existing debt.
- Consider converting loans to equity prior to year-end.
(5) What are my possible long-term solutions that would mitigate Subpart F exposure (e.g., check-the-box planning)?
Now is also the time to revisit long-term planning options that may alleviate the issue entirely. Certain foreign structures can be created that are free of Subpart F inclusions and have no local country or operational implications. If expiration of the Subpart F Look-Through Rule is inevitable, consider the benefit of restructuring into a “Subpart F free” structure.
Alvarez & Marsal Taxand Says:
The good news is that options are available to prepare for another year of legislative uncertainty. Be proactive about your financial accounting needs and short-term fixes. Think long-term about strategy. The burden of Subpart F can possibly be better managed with the right planning.
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