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should apply to digital businesses that derive UNITED STATES
significant value from U.K. user participation and
to revenue relating to U.K. users, according to the Recent Tax Court Case May Confine
new paper. This would include revenue from Altera to Transfer Pricing
online advertising targeting U.K. users of an
by Andrew Velarde
online platform, regardless of the physical
location of the business, the paper says. At least one practitioner is questioning if a
Using gross revenue as the tax base could recent Tax Court case upholding the validity of
cause problems given the differences in subpart F regulations might blunt the impact of a
taxpayers’ profitability, according to Bill Dodwell high-profile Tax Court case that invalidated
of Deloitte. “The U.K. continues to support the another set of regs.
EU’s position that a tax on sales is needed in the The Tax Court in Altera Corp. v. Commissioner,
interim, pending broader change. This remains 145 T.C. 91 (2015), invalidated regs that require
challenging, since business profitability varies participants in qualified cost-sharing
wildly, and a new tax could apply to large loss- arrangements to share stock-based compensation
making businesses,” he said. “There are examples costs, finding that they were arbitrary and
of some businesses that have been forced to capricious.
withdraw from markets due to high taxes on However, a more recent ruling could be
sales.” interpreted to “cabin Altera to the context of
The paper says the government is aware of the transfer pricing regulations,” according to Jim
potential distortions associated with using gross Gadwood of Miller & Chevalier Chtd., speaking
revenue as a proxy for taxable profit, including at a March 9 Federal Bar Association Section of
the imposition of tax on loss-making businesses. Taxation conference in Washington.
To mitigate these distortions, the paper suggests a In January, the Tax Court in SIH Partners LLLP
rate set at an appropriate level, a high de minimis v. Commissioner, 150 T.C. No. 3 (2018), upheld the
threshold, and the possible inclusion of safe validity of section 956 regulations and found that
harbors for businesses with losses or low profit a partnership had income inclusions under
margins. The government will continue exploring sections 951 and 956 from two controlled foreign
whether and in what circumstances revenue corporations that guaranteed obligations for a
could be offset by passthrough costs, including U.S. entity.
advertising revenue passed on to third-party Finding that the rules were entitled to Chevron
websites.  deference, the court held that Treasury’s
procedures in promulgating the rules satisfied the
general requirement to provide an explanation
that will enable the court to evaluate Treasury’s
rationale at the time of decision and were not
arbitrary or capricious. The decision makes only
two brief citations to Altera without any detailed
discussion of the earlier case.
The court in SIH Partners was also quick to
differentiate its facts from a seminal case in the
administrative law world — Motor Vehicle
Manufacturers Association v. State Farm Mutual
Automobile Insurance Co., 463 U.S. 29 (1983) —
wherein the Supreme Court established that
review of arbitrariness requires a “hard look” to
determine if the agency engaged in reasoned
“Treasury’s rulemaking in this case differs
fundamentally from the agency action in State


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Farm because Treasury’s decision did not (and Partnership Dispositions’ Withholding
could not) purport to rely on findings of fact,” the Suspension to Be Expanded
court in SIH Partners held. “Treasury’s actions
promulgating the rules for pledges and by Andrew Velarde
guaranties reflect at most the implementation of a The recent suspension of new withholding
policy judgment. The administrative record obligations enacted by the Tax Cuts and Jobs Act
reflects that no substantive alternatives to the final (P.L. 115-97) for dispositions of partnership
rules were presented for Treasury’s consideration interests by a foreign person will be expanded to
during the rulemaking process,” it said. non-publicly-traded partnerships as well.
“The court in SIH [Partners] seemed to be of According to Brenda Zent, special adviser,
the view that State Farm is a more strict level of Treasury Office of International Tax Counsel,
scrutiny than what is ordinarily required under Treasury is working on a second notice to provide
the Administrative Procedure Act,” Gadwood the expanded relief, though she did not provide a
said, noting that the rationale was not entirely timeline for its release. Zent spoke at a March 9
clear to him. Tax Law Conference in Washington sponsored by
The future fallout from Altera — on appeal the Federal Bar Association Section on Taxation.
before the Ninth Circuit — has been the subject of In Notice 2018-8, 2018-4 IRB 1, released
much debate, and it has already affected December 29, Treasury and the IRS announced
rulemaking.  the temporary suspension of withholding
obligations under new section 1446(f) for
dispositions of some publicly traded partnership
(PTP) interests. The notice said that regulations or
other guidance will be issued on how to withhold,
deposit, and report the tax withheld under section
1446(f) for those dispositions. Notice 2018-8
responds to the new 10 percent withholding tax
applicable on amounts realized from the
disposition of a partnership interest by a non-U.S.
person under the TCJA and was seen as a
necessary reprieve by practitioners.
The upcoming notice will be limited to issues
under section 1446 rather than substantive issues
under section 864, according to Zent. The TCJA
also amended section 864(c) so that if a foreign
person owns an interest in a partnership that is
engaged in a U.S. trade or business, gain or loss on
the sale or exchange of such interest is treated as
effectively connected with the conduct of such
trade or business to the extent it does not exceed a
specified amount.
In separate letters, both the Securities Industry
and Financial Markets Association and PwC
previously requested the expansion for
nonpublicly traded partnerships.
“Many of the challenging issues described in
the notice as affecting transferees and PTPs in
applying new section 1446(f) also affect
nonpublicly traded partnerships,” the PwC letter
states. “In order to ensure an orderly, effective,
and efficient implementation of the new


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withholding rules for nonpublicly traded TCJA Vindicates IRS’s Transfer Pricing
partnership interests there is also need for Positions, Official Says
regulations or other guidance.” Both letters said
guidance is needed for numerous issues, by Ryan Finley
including those related to certification and Amendments made by the Tax Cuts and Jobs
documentation, withholding, and intermediaries Act (P.L. 115-97) confirm that the IRS’s long-
and agents.  standing views on the definition of intangibles
and selecting transfer pricing methods were
correct all along, according to an IRS official.
Speaking March 9 at the Federal Bar
Association Section on Taxation Tax Law
Conference in Washington, Robert Kelley,
assistant to the Branch 6 chief of the IRS Office of
Associate Chief Counsel, said the TCJA’s
amendments to sections 482 and 936(h)(3)(B) will
not require any major changes to the section 482
regulations. According to the TCJA conference
report, the amendments “confirm the authority to
require certain valuation methods” and “do not
modify the basic approach of the existing transfer
pricing rules with regard to income from
intangible property.”
“I think the codification is pretty clearly a
vindication of the pricing approaches we’ve been
taking for a number of years now,” Kelley said. “I
think, just like what Congress did with the
definition of [intangibles] in [section] 936, these
were really clarifications of what existing, prior
law really was, and so I think from our
perspective this is clearly a confirmation of what
we’ve already been doing.”
Although the 1994 update to the section 482
regulations states that the IRS may price
transactions based on the realistic alternatives
available to the taxpayer or aggregate multiple
transactions if that provides the most reliable
result, the IRS has failed to persuade the Tax
Court to apply these rules in Veritas Software Corp.
v. Commissioner, 133 T.C. 297 (2009), and Inc. v. Commissioner, 148 T.C. No. 8
Kelley said the IRS received a boost from the
Tax Court’s decision in Wycoff v. Commissioner,
T.C. Memo. 2017-203, in which the court accepted
the IRS’s application of the comparable profits
method over the taxpayer’s combination of
transactional approaches. Like the realistic
alternatives principle and aggregation rules, the
profit-based CPM was introduced by the 1994
regulations. The IRS had been unsuccessful in


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court in many of its earlier efforts to apply the Action 2 Report Instructive for
CPM, including in Medtronic v. Commissioner, T.C. Hybrid Dividend Rules
Memo. 2016-112.
by Alexander Lewis
“Over the years we’ve gotten arguments from
taxpayers in controversies that for some reason or The action 2 report from the OECD’s base
another the CPM is not a good method or that erosion and profit-shifting project may be
courts don’t like or have never accepted the CPM, instructive for taxpayers attempting to interpret
despite, of course, the fact that the CPM is used in the phrase “other tax benefit” under the hybrid
a majority of [advance pricing agreements], and dividend rules in IRC section 245A.
despite what our regs say about it and what the Speaking March 9 on a panel on international
OECD [transfer pricing guidelines] say,” Kelley tax developments at the Tax Law Conference of
said. “I think Wycoff is a good rebuttal to those the Federal Bar Association Section on Taxation in
arguments that taxpayers have made.” Washington, Doug Poms, Treasury international
Because the amendments clarify rather than tax counsel, said taxpayers evaluating whether a
change existing law, any post-TCJA revisions to payment from a controlled foreign corporation to
the section 482 regulations will be minor. a U.S.-based C corporation is a hybrid dividend
“Any time a statute changes in this way, it under section 245A(e) because of the CFC’s receipt
might make sense to sort of do a housekeeping or of a deduction or other tax benefit for the
a cleanup type change to the corresponding dividend in a foreign jurisdiction may find it
regulations, though I would make the point that helpful to review the BEPS action 2 report on
in our view, the definition of intangible under hybrid mismatches. Poms has emphasized this
current [reg. section 1.482-4] is broad enough to point in the past.
include items that Congress now decided “The statute definitely contemplates a
specifically to list out in the statute,” Kelley said. deduction or other tax benefit in a foreign
“I’d also note that we believe that the flush jurisdiction. We’re going to have to interpret what
language of the catchall provision, even in current ‘or other tax benefit’ means,” Poms said. “The
[reg. section 1.482-4(b)], is extremely broad, so issue was also considered in the action 2 BEPS
this would be more sort of a housekeeping type of hybrids work. In developing the hybrid rules, the
change, but we’re certainly considering it.”  [action 2] report says the [“other tax benefits”]
include amounts that are equivalent to the
deduction and should include any tax relief that is
economically equivalent to a deduction, such as a
tax credit for dividends paid.”
Instead of focusing on interpreting the hybrid
rules, some taxpayers are looking to avoid the
rules entirely, said Carol Tan, IRS special counsel.
“In terms of BEPS action item 2, I think one of the
things we anticipate is that with these rules it will
be a deterrent. I think we’re going to get into
issues as to whether something falls within the
rule or it doesn’t in terms of the technical
interpretations, but we have also been hearing
questions about unwinding structures that have
hybrid instruments in place,” she said.
Tan said IRS officials are evaluating questions
of interpretation in other areas of the Tax Cuts and
Jobs Act as well. One such area is the new foreign-
derived intangible income provisions. Tan said
Treasury has received several questions regarding


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what level in group structures, including tiered Participation Exemption System
partnerships and consolidated groups, is eligible Changes Paradigm for CFC Spinoffs
for the deduction. She added that clarifying the
by Emily L. Foster
foreign-derived intangible income’s foreign-use
requirement is also a priority for the agency.  The transition to a territorial international tax
system under the Tax Cuts and Jobs Act raises
questions concerning the device and business
purpose requirements for tax-free spinoffs
involving controlled foreign corporations.
The new participation exemption system
under the TCJA (P.L. 115-97) with a dividends
received deduction creates a paradigm shift that’s
contrary to the underlying premise of section 355
if dividend treatment is now “not such a bad
thing,” Robert Wellen, IRS associate chief counsel
(corporate), said March 9 during the Federal Bar
Association Section on Taxation conference in
Washington. The appropriateness of that section’s
principal focus — whether a distribution would
be taxed as a dividend — and the traditional
device test in the international context are now
being questioned, he said.
A corporation may generally distribute the
stock of a controlled corporation to its
shareholders without recognizing gain or loss if
the requirements of section 355 are met. The
device requirement for those tax-free spinoffs
prevents corporations from structuring
transactions primarily for the purpose of
distributing the company’s earnings to
shareholders at favorable tax rates rather than
having the distributions treated as section 301
dividends that would be taxed at higher rates.
The participation exemption under section
245A provides a 100 percent dividends received
deduction for the foreign-source portion of
dividends paid to U.S. corporate shareholders
owning 10 percent or more of the foreign payer
corporation for longer than a year.
Jay M. Singer of McDermott Will & Emery
said the traditional thinking that companies may
structure spinoff transactions to convert dividend
income to capital gains may no longer apply in the
context of CFC spinoffs because dividends paid to
U.S. corporate shareholders would not be subject
to tax while the capital gains on the disposition of
CFC stock would still be taxed.
Section 1248 rules also operate differently
under a participation exemption system because
those rules generally prevent companies with
significant earnings and profits from “escaping


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taxation on the disposition of CFCs” by recasting either a foreign entity is sandwiched between two
capital gains as dividends, Singer said. That U.S. entities or the other way around, and the
regime “has gone from something [designed] to entity at the bottom of the structure is spun off to
protect the fisc to something that is a friend of the the parent.
taxpayer” because the deemed dividend qualifies Singer explained that the sandwich structure
for the section 245A deduction, he said. generally arises when a U.S.-parented corporation
Now that deemed dividends paid from CFCs acquires a foreign-parented company that has a
to U.S. corporate shareholders are “generally U.S. subsidiary, which can result in “an
good for U.S. taxpayers rather than bad,” inconvenient and inefficient structure.” Thus,
practitioners are wondering how the IRS will corporations then look for a way to combine all
apply the device requirement in the context of the U.S. subsidiaries into a single consolidated
CFCs, Singer said. group.
The IRS has given this some thought, but “it’s According to Singer, it has been difficult for
far too early for us to have reached any practitioners to write opinions for taxpayers that
conclusions [on] how we might adapt these their transaction — spinning out of a sandwich —
rules,” Wellen said. Under final regulations that
meets section 355 business purpose requirements
have been in place for a long time, “if a dividend
because the U.S. tax benefits were so significant.
is subject to a 100 percent or 80 percent dividends
But under the TCJA, the stakes — the tax
received deduction, then ordinarily the
inefficiencies of the sandwich structure — are
transaction is a device. That kind of points the
way to looking at this,” he said, noting that there dramatically reduced by the participation
aren’t any rules for dealing with the new exemption system, which raises the question
international regime. whether the IRS would view the section 355
Wellen suggested that whether “old- business purpose hurdle differently for those
fashioned device thinking would be appropriate transactions in which the corporation is trying to
is going to be fact-intensive,” which will put more consolidate all its U.S. subsidiaries into a single
pressure on the IRS’s letter ruling process to group.
determine whether consequences of a taxable Wellen agreed that the stakes involved in
section 301 dividend are in fact benign or whether spinning out of a sandwich qualifying under
in some cases “other consequences might be less section 355 are likely to be reduced compared
friendly.” with pre-TCJA scenarios, but said that may not
Wellen said he doesn’t envision the IRS necessarily affect the narrow question of business
“reaching a systematic global view of the purpose. He noted that whether “joining a
consequences of these changes for quite some consolidated group is the kind of business
time,” but the agency is “open for business” on purpose that [section] 355 is intended to cover” is
letter rulings that could involve device issues. The something the IRS is going to have to think about.
IRS will need to understand how all the moving If a taxpayer has an important tax and nontax
parts in the international tax provisions work in a business purpose for a section 355 spinoff but
taxpayer’s deal before it “could make an intelligent each is insufficient by itself to do the transaction,
assessment of what an alternative [section] 301 Wellen said that could be a legal issue that the IRS
distribution might look like,” he added. might consider ruling on. He emphasized that
In May 2017 Wellen said the IRS will only rule generally the IRS resists evaluating a taxpayer’s
on significant legal issues pertaining to the device business purpose and that these “novel
requirement and that generally questions questions” would have to go through an internal
involving the ambiguity of the good and bad challenge process.
device factors would be legal issues the IRS would In August 2016 the IRS announced in Rev.
be interested in. Proc. 2016-45, 2016-37 IRB 344, that it would rule
Sandwich Spinout: Good Business Purpose? on significant legal issues not inherently factual in
nature pertaining to whether a tax-free section 355
Multinationals have used transactions to spinoff is motivated by a nonfederal tax corporate
unwind so-called sandwich structures in which business purpose. 


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IRS Floats Release of Tax Data to The proposed regulations would add the State
State Department Contractors Department to the list of agencies whose officers
and employees may disclose returns and return
by J.P. Finet information to any person, or to an officer or
The IRS could release the tax information of employee of that person, for tax administration
individuals with seriously delinquent debts to purposes in connection with a written contract for
contractors working with the State Department to the acquisition of property or services, the IRS
approve or deny passports under new proposed said. 
“The purpose of these regulations is to allow
the Department of State to share tax return
information with its contractors for tax
administration purposes,” the IRS said in the
proposed regs (REG-129260-16). The State
Department is responsible for meeting standards
for safeguarding the information, it said.
Under the Fixing America’s Surface
Transportation (FAST) Act, the State Department
is generally required to deny or revoke the
passports of individuals certified by the IRS as
having seriously delinquent tax debts. The act
generally defines this as an unpaid, legally
enforceable individual federal tax liability of more
than $50,000. Additionally, the individual’s
administrative rights regarding a notice of lien
must have been exhausted or lapsed, or a levy
must have been made.
Some observers have predicted that the
statute will lead to litigation.
While the FAST Act authorizes the IRS to
disclose these delinquent taxpayers’ information
to State Department officers and employees, the
State Department often uses contractors — who
do not qualify as officers or employees — to carry
out its responsibilities regarding passports, the
regs note. However, the IRS said section 6103(n)
authorizes the disclosure of returns and return
information to any person for the purpose of tax
administration in connection with a contract for
Treasury regulations provide that officers and
employees of the Treasury Department, a state tax
agency, the Social Security Administration, or the
Justice Department are authorized to disclose
returns and return information to an officer or
employee for the purposes of tax administration,
the IRS said. With written authorization from the
IRS, those agencies may disclose information to
their agents or subcontractors to the extent
necessary to provide services.


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AICPA Lobbying for Downward percent of the stock of a foreign subsidiary of the
Attribution Transition Tax Relief same foreign parent and converting the foreign
subsidiary into a CFC.
by Andrew Velarde
Practitioners have previously questioned how
Recent changes to downward attribution rules the repeal would affect the definition of a
that treat some foreign corporations as controlled specified foreign corporation and have criticized
foreign corporations require immediate relief previous guidance on the transition tax for its
from the transition tax, according to the American failure to address larger concerns surrounding the
Institute of Certified Public Accountants. repeal. Treasury has acknowledged that whether
In a March 13 letter to the IRS and Treasury, it has the authority to essentially turn on section
the organization asked the government to use its 958(b)(4) for some transactions in light of the
authority under section 965(o) to grant relief from TCJA is “a good question,” and has sought public
the income inclusion. The relief would exclude input for how to address the issue.
from the definition of a specified foreign The AICPA argued that income inclusion
corporation a foreign corporation that is included would be inconsistent with the intent of section
only because of the downward attribution rules of 965 and the repeal of section 958(b)(4). It cited the
section 318(a)(3). conference report’s explanation for the provision
For purposes of determining a U.S. as a way “to render ineffective certain
shareholder’s section 965 inclusion under the transactions that are used as a means of avoiding
transition tax, a specified foreign corporation is the subpart F provisions,” like de-control
defined as any CFC or foreign corporation with a transactions that would convert a former CFC to a
domestic corporation as a U.S. shareholder. non-CFC despite continuous U.S. shareholder
“Interpreting the plain language of the ownership. It also cited the Senate Finance
relevant code sections does not provide the Committee explanation that the repeal provision
intended result of the [Tax Cuts and Jobs Act], was not intended to treat a foreign corporation as
resulting in an increasing number of taxpayers a CFC because of ownership attribution under
falling under the definition of a U.S. shareholder section 318(a)3) to an unrelated U.S. person to the
of a CFC greater than anticipated by Congress,” U.S. shareholder of the foreign corporation. 
the letter states. “In order to address this issue, a
technical fix to the statutory language is likely
required since the IRS does not appear to have
sufficient regulatory authority to apply a broad
solution. However, the AICPA believes that the
grant of authority in section 965(o), which
provides that the ‘Secretary shall prescribe such
regulations or other guidance as may be necessary
or appropriate to carry out the provisions of this
section’ (emphasis added), is sufficient to allow
the IRS to implement our recommended targeted
Section 958(b) provides rules for determining
constructive stock ownership of a foreign
corporation for subpart F purposes. In its
transition tax provision the TCJA repealed section
958(b)(4), which had provided that downward
attribution was not to be applied so that a U.S.
person would be regarded as owning stock
owned by a non-U.S. person. As the AICPA noted,
the repeal could result in a foreign-parented U.S.
subsidiary being treated as the owner of 100


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IRS Explains How Section 965 Reporting IRS Offshore Voluntary Disclosure
Affects 2017 Tax Returns Program to Close in September
by Alexander Lewis by Nathan J. Richman
The IRS has released a list of FAQs for The IRS has announced that it will close its
taxpayers affected by section 965 that explains offshore voluntary disclosure program on
how they should report their section 965 liabilities September 28.
and outlines several elections they can make In general, the OVDP frees previously
under section 965. noncompliant taxpayers from the risk of criminal
The FAQ explains which taxpayers are prosecution and other potential penalties,
required to report section 965 income: any person including the foreign bank account report
that is a U.S. shareholder, either directly or sledgehammer. In exchange, taxpayers entering
indirectly as a result of ownership through a the program must cooperate and pay taxes,
passthrough entity, in a deferred foreign income interest, and penalties, including accuracy-related
corporation (as defined in section 965(d)). penalties, failure-to-file penalties, and a
Affected taxpayers should report section 965 miscellaneous penalty of 27.5 percent or 50
income as reflected in the table included in percent of account value.
Appendix: Q&A2 to the FAQ. The FAQ also notes Released on March 13, the newly updated
that affected taxpayers must include with their FAQs and announcement both make clear that the
returns an IRC 965 Transition Tax Statement, and streamlined filing procedures for taxpayers
lists all the information that must be included in
whose noncompliance has not been willful does
the statement. A model statement is included in
not stop with the end of the OVDP. However, the
Appendix: Q&A3.
announcement does warn that the streamlined
Available elections — like the election to pay
program may close in the future as well.
the transition tax over eight years — and who can
In the announcement, the IRS notes that the
make them under section 965 are also explained.
number of taxpayers coming in through the
The FAQ says that Treasury and the IRS will issue
more guidance before April 2 regarding the OVDP has declined in recent years, with only 600
availability of elections to direct and indirect in 2017. Since 2009 the OVDP has resulted in over
partners in domestic partnerships, shareholders 56,000 disclosures that have included taxpayers
in S corporations, and beneficiaries in other paying $11.1 billion in taxes, penalties, and
passthrough entities that are subject to section interest, according to the announcement.
965. The FAQ also lists the additional information According to the updated FAQs, a complete
that domestic partnerships, S corporations, and voluntary disclosure must be postmarked by
other passthrough entities are required to report September 28, 2018, to qualify for the OVDP.
to their partners, shareholders, or beneficiaries in “Partial, incomplete, or placeholder submissions”
connection with section 965. will not hold the door open, the FAQs note.
“A taxpayer should make two separate Mark E. Matthews of Caplin & Drysdale Chtd.
payments as follows: one payment reflecting tax said that the recent, precipitous decline in OVDP
owed without regard to section 965 of the Code, submissions makes the end of the program
and a second, separate payment reflecting tax unsurprising, especially since the IRS previously
owed resulting from section 965 of the Code,” the warned that the OVDP would eventually end.
FAQ says. Barbara T. Kaplan of Greenberg Traurig LLP
The IRS also requests in the FAQ that said, “Those with continuing criminal tax
taxpayers filing Form 1040 electronically wait exposure should act now to come into compliance
until April 2 to file so the agency can make before this program is discontinued.” She
necessary system changes.  attributed the reduced importance of the OVDP in
part to the IRS’s access to data from the Foreign
Account Tax Compliance Act.


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Charles Bruce, legal counsel to American passport revocation, and the last call for OVDP
Citizens Abroad and an attorney with Bonnard submissions, those taxpayers will have to
Lawson-Lausanne, said, “There are many people carefully consider how to move forward, he said,
who still have not come forward and, in my view, adding that tragically the options under
many of these cannot go the route of the consideration will include renouncing their U.S.
streamlined filing compliance procedure because citizenship.
they cannot swear to being ‘nonwillful.’” Andrew Velarde contributed to this article. 
Jeffrey A. Neiman of Marcus Neiman &
Rashbaum LLP told Tax Analysts, “By closing
OVDP, the IRS is not shutting the door on those
with undeclared offshore assets. There are still
other means for taxpayers to come forward.”
Kaplan noted that both the streamlined
program and the standard voluntary disclosure
program included in the Internal Revenue
Manual remain after the announcement.
The updated FAQs include an opening for
practitioners and taxpayers to send feedback and
suggestions for the future of voluntary
disclosures to the IRS Large Business and
International Division.
“I think it is encouraging and good practice
for the IRS that they are seeking practitioner
comments,” Matthews said. “We appreciate that
In the past couple of years, practitioners have
been raising questions about the costliness of the
Neiman, a former tax prosecutor, said he
thought the OVDP was flawed. “Under OVDP,
the penalty regime just became too rigid and too
excessive,” he said, adding that he hopes the IRS
will approach future disclosures more practically.
As a result of a 2015 IRS memorandum (SBSE-
04-0515-0025) that generally limits the penalty for
willful failure to file FBARs to 50 percent of the
high value of the account during open years, the
closure will likely have limited impact on those
taxpayers who failed to file or filed false FBARs,
Matthews said. The primary effect of the OVDP
closure may be to put the sections 6663 and
6651(f) fraud penalties and other, non-FBAR
information return penalties in play, he added.
Bruce said that many of the taxpayers who
still need to come into compliance are Mexican
and Canadian so-called accidental Americans
who may not have fully appreciated their U.S. tax
filing obligations. Between the FATCA
information disclosures, the possibility of


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Corporate Tax Reform Winners and Allergan recorded an overall benefit of $2.8
Losers billion related to the Tax Cuts and Jobs Act (P.L.
115-97), comprised of a $730 million tax expense
by Amanda Athanasiou payable on deemed repatriated earnings and a
Forecasts of foreign-based multinationals, $3.5 billion reduction of U.S. deferred tax
including some that inverted in recent years, liabilities.
suggest that their tax rates may not be helped, and Johnson Controls’ CFO Brian Stief said he
are sometimes hurt, under U.S. tax reform. Their expects a 14 percent effective tax rate in fiscal 2018
U.S. counterparts are reporting better results. and a rate of between 16 and 18 percent in fiscal
Foreign-owned companies were treated 2019, “based upon the effective dates of certain
especially harshly by U.S. tax reform, Michael provisions of the new legislation.” Johnson
Layden of Deloitte said during a February 27 Controls inverted to Ireland in 2016 through its
webcast on U.S. tax reform and corporate growth €15 billion acquisition of Tyco International.
strategies sponsored by Deloitte. Foreign U.S. tax reform was cited by the company’s
multinationals have done an exceptional job of CEO, George Oliver, on March 12 as among the
stripping the U.S. tax base through interest factors to be considered as it contemplates selling
expense deductions and other base-eroding or spinning off its auto battery business. Johnson
payments, so the new rules hit those companies Controls recorded a net tax charge of $200 million
especially hard, he said. for the first quarter of 2018, comprised of a $100
“I think the expectation is that if you’re a million benefit related to the remeasurement of
foreign multinational, you’re likely to pay more U.S. deferred tax liabilities offset by a repatriation
tax in the U.S. going forward and you’ll have to charge of $300 million.
work much harder to achieve a similar result,” Eaton Corp. PLC said it expects a tax rate of
Layden said. between 13 and 15 percent for 2018 — an increase
over its rates of 11.3 percent in 2017 and 9.4
Higher Tax Rates for Foreign Multinationals percent in 2016. “We expect our tax rate for 2019
Allergan PLC, which moved its tax home out onwards to stabilize in the 14 percent to 16 percent
of the United States when it was acquired by range,” CEO Craig Arnold said February 1.
Ireland’s Actavis PLC in 2015, reported a 12.6 Formerly Ohio-based Eaton Corp. acquired
percent effective tax rate for 2017, which it expects Dublin’s Cooper Industries in a $13 billion
will increase to roughly 14 percent in 2018, transaction in 2012.
“reflecting the full impact from U.S. tax reform,” Eaton issued guidance December 28, 2017,
outgoing CFO Maria Teresa Hilado said during a reflecting an anticipated one-time charge from the
February 6 earnings presentation. TCJA of between $90 million and $110 million in
“Now that corporate tax reform has passed, the fourth quarter of 2017, but company
the advantages of being an inverted company are executives announced February 1 that U.S. tax
less obvious,” said Jami Rubin of Goldman Sachs, reform has instead yielded a $62 million benefit
who asked CEO Brenton Saunders if he had for the company. “The adjustment of our deferred
considered “reinverting.” “Certainly, there would tax assets and liabilities to the lower tax rate
be a great PR advantage, I would think, to moving created $79 million of income, which was partially
back,” Rubin said. “No, we’re an Irish company; offset by a $17 million charge for the mandatory
we’re going to stay in Ireland,” Saunders replied. repatriation tax,” Arnold said.
Despite speculation that mergers and Eaton CFO Rick Fearon said that although an
acquisitions will pick up now that U.S. tax reform analyst had suggested that the company’s tax bill
has passed, Saunders said Allergan will be taking might require Eaton to change its manufacturing
a break from its stepping-stone M&A strategy. footprint, “we don’t believe that there will be any
“It’s most likely that 2018 will be a relatively need to make any significant changes as a result of
boring year for Allergan on the M&A front,” he the tax bill.”
said. Executives of Canada-based Valeant
Pharmaceuticals said February 28 that they expect


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a 13 percent effective tax rate for the company in department. U.S. tax reform is expected to benefit
2018, roughly the same as 2017’s rate. But “net-net, GlaxoSmithKline’s effective tax rate by 2 to 3
the impact of U.S. tax reform on 2018 is that we percentage points, CFO Simon Dingemans said
will pay a bit more in U.S. cash taxes,” CFO Paul during the company’s February 7 earnings call.
Herendeen said during a year-end earnings The company’s expected effective tax rate for 2018
presentation. and subsequent years is 19 to 20 percent, he said.
Valeant has “a very good tax structure, which Dingemans said U.S. tax reform will also help
enables us to convert a large proportion of our stabilize the company’s tax rate, which was
earnings to cash, which is a good thing when previously expected to rise over time. “The lower
you’re a leveraged company,” Herendeen said. tax rate will increase our flexibility to support our
Valeant recorded an income tax benefit of $4.1 capital allocation priorities, particularly pharma
billion in 2017, attributable primarily to a tax R&D,” he said. An increase in the after-tax
reorganization effort and benefits from the TCJA, valuations of GlaxoSmithKline’s U.S. businesses
the company said in a February 28 release. was also attributed to U.S. tax reform.
Mylan NV said it expects its 2018 effective tax The impact of the tax legislation’s changes,
rate to fall between 17.5 and 19 percent — not particularly in the U.S., will allow Sanofi to adjust
necessarily an improvement over its 18 percent its expected effective tax rate for 2018 to around 22
tax rate for 2017. “For 2018, we do expect the percent, down from a rate of 23.5 percent in 2017,
potential slight upward pressure on our adjusted according to company CFO Jérôme Contamine.
effective tax rate due to the implementation of the “In tax, there are a lot of moving pieces across the
tax reform changes” and changes to the world. Of course, the most important is the U.S.,
company’s mix of geographic profits, CFO but I will not minimize the evolution of the tax
Kenneth Scott Parks said during Mylan’s fourth- rate in France either,” Contamine said.
quarter earnings presentation February 28. France has announced plans to reduce its
Medtronic, which redomiciled in Ireland corporate tax rate from 33.33 percent in 2017 to 28
through its acquisition of Covidien PLC in 2015, percent by 2020. The government’s draft budget
reported a tax rate of 14.6 percent for the first for 2018, released in September 2017, proposed
three quarters of fiscal 2018 and said it expects its cutting the rate further: to 25 percent by 2022.
fourth-quarter tax rate to be between 15 and 16
percent. “Our initial estimates indicated that we U.S. Pharmaceutical Companies
would benefit from a slightly lower effective tax The new tax code addresses the historical
rate beginning in fiscal year 2019,” CFO Karen competitive disadvantage of U.S.-based
Parkhill said during a February 20 earnings call. multinationals in terms of tax rates and
Medtronic reported a $2.2 billion tax charge international access to capital, and helps level the
related to the transaction tax on accumulated playing field for U.S. companies, Pfizer CEO Ian
income. Read said during the company’s fourth-quarter
“Medtronic has been advocating for U.S. tax 2017 earnings call January 30. Read has long been
reform for many years, and we are pleased that one of the industry’s most vocal advocates for U.S.
the final package included the ability to gain tax reform.
access to our future earnings outside the United Thanks to the new tax rules, Pfizer plans to
States,” Parkhill said. “We do have $14 billion of invest approximately $5 billion in capital projects
cash on our balance sheet, and we have access to in the United States, including the strengthening
the vast majority of that post-tax reform,” she of its domestic manufacturing presence,
said, adding that the larger benefit of the new according to Read. The new corporate tax rate
rules will be the company’s ability to access reduced the company’s 2017 provision for taxes
ongoing cash generation in the future. by $10.7 billion, primarily because of the
Some foreign-based non-inverters — in remeasurement of deferred tax liabilities, CFO
particular, British pharmaceutical company Frank D’Amelio said.
GlaxoSmithKline and French pharmaceutical Pfizer said it expects to repatriate the majority
Sanofi — fared a little better in the tax rate delta of its offshore cash stockpile, which is one of the


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largest among U.S. multinationals, in 2018. The up significantly in 2018, due in part to revenue
company anticipates a repatriation tax bill of $15 increasing in the United States, she added.
billion, according to a January 30 release. Merck’s TCJA-related charge for the last
D’Amelio said tax reform has not increased the quarter of 2017 was $2.6 billion, which included
chances that Pfizer will spin off its essential health its repatriation tax of $5 billion, offset by
business. adjustments to deferred tax liabilities. The
D’Amelio said Pfizer’s effective tax rate is company’s tax rate was 19.1 percent for 2017,
expected to be approximately 17 percent in 2018, down from 22.3 percent for 2016. The company
which is significantly lower than the said it expects an effective tax rate of 19 to 20
approximately 23 percent it had anticipated for percent for 2018.
2017. While Pfizer does business in over 150 Asked why the rate is expected to be relatively
countries, “the major part of business is inside the flat in 2018 compared with 2017 while Merck’s
U.S.,” D’Amelio said. peers are expecting lower rates, CFO Robert Davis
Tax reform doesn’t fundamentally change said 2017’s rate benefited from some one-time tax
how the company views M&A, Read said, adding items related to foreign tax credits. “We have a
that he expects company valuations to change as higher mix of income in the United States relative
the premiums for tax advantages of some to some other companies,” Davis said, adding
companies disappear. “We’ll continue to look at that he expects the rate to decline after 2018.
M&A from the point of view of value for our AbbVie, which is still embroiled in lawsuits
shareholders, and we’ll be directed by the science concerning the failure of its planned inversion in
and the opportunities,” he said. 2014, said it expects its tax rate to increase from 9
Johnson & Johnson’s M&A strategy will also percent in 2018 to 13 percent over the next five
stay consistent post tax reform, according to CEO years because of increased domestic income and
Alex Gorsky. Tax reform “helps make us more investment. “Our business mix will change over
competitive, particularly on an international level the coming years, most notably with products
because now we have greater flexibility on how driving increased U.S. revenue and income,”
we can access that cash,” he said during a January which will drive the tax rate up, CFO William
23 earnings presentation. Chase said during the company’s fourth-quarter
CFO Dominic Caruso said roughly $12 billion earnings call. Even 13 percent would be an
of Johnson & Johnson’s$16 billion in offshore cash improvement over the company’s 2017 rate of 18.9
will be repatriated immediately. The company’s percent.
TCJA charge was $13.6 billion. Its expected AbbVie’s repatriation tax was $4.5 billion.
effective tax rate for 2018 of 16.5 to 18 percent Over the next five years the company will invest
doesn’t differ significantly from its 2017 rate of $2.5 billion in capital in the United States,
17.2 percent. according to CEO Richard Gonzalez. 
Gilead Sciences reported a $5.5 billion charge
in the fourth quarter of 2017 related to the TCJA.
The company said it expects a 21 to 23 percent tax
rate for 2018, down from its 2017 rate of 24.5
percent. “Tax reform will have a positive impact
on Gilead’s earnings by lowering our global
effective tax rate and increasing our financial
flexibility as a result of our ability to repatriate our
ex-U.S. cash,” CFO Robin Washington said,
adding that the TCJA doesn’t fundamentally
change the company’s capital allocation priorities.
The new tax law will enable Gilead to invest in
R&D, expand U.S.-based manufacturing, and
create U.S. jobs, Washington said. Without the
new law, the company’s tax rate would have crept


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