Fluent Essays

The tax laws associated with foreign transactions are found in the 900s section of the Internal Revenue Code (IRC). Using the first letter of your last name, answer the question below for which the letter of your name falls in the range. Use your own words to summarize the information from the tax code. Provide proper citations for sources used, including the tax code. S – Z: Refer to the IRC, Subchapter N and summarize one of the code sections in Subpart J. Provide an example as to how the tax code would apply to a taxpayer. 39 ITAI GRINBERG is a Professor of Law at Georgetown Law and a member of the Institute of International Economic Law at Georgetown. International Taxation in an Era of Digital Disruption: Analyzing the Current Debate By Itai Grinberg* Introduction For the University of Chicago Federal Tax Conference in November 2018, I was asked to write a paper “discussing what the U.S. position should be and how the U.S. tax rules should be changed (or not) in reaction to European tax changes such as the proposed gross tax on digital receipts, the digital PE, and the diverted profits tax.” A core tax policy claim some European governments are advancing is that user data or user participation in the digital economy justifies a gross tax on digital receipts, new profit attribution criteria, or a special formulary apportionment (“FA”) factor in a future formulary regime. One fundamental question these claims raise is whether there is anything unique about the digital economy. In the BEPS project the OECD undertook an evaluation of whether the digital economy can (or should) be “ring-fenced,” and concluded that it neither can be nor should be. But the OECD’s conclusion is not stopping some European governments from pursuing proposals that attempt to apply special tax regimes to a limited set of digital businesses.1 Importantly, simply concluding that there should be no special rules for the digital economy does not resolve the broader question of whether the interna- tional tax system requires reform prompted in part by the digitalization of the economy. Indeed, a debate about this question is ongoing at the OECD. We know more about the contours of that debate today than we did when I was first asked to undertake this paper. The practical reality appears to be that all the largest economies have come to agree either that a) there is something wrong with the taxation of the “digital economy,” or b) there is something more fun- damentally wrong with the structure of the current international tax system in an era of globalization and digitalization.2 Government representatives have now made this plain in multiple public forums. So, one way or the other, we lack a stable status quo.3 MARCH–APRIL 2019 © 2019 I. GRINBERG 40 INTERNATIONAL TAX JOURNAL MARCH–APRIL 2019 INTERNATIONAL TAXATION IN AN ERA OF DIGITAL DISRUPTION: ANALYZING THE CURRENT DEBATE This paper sets out some considerations for U.S. inter- national tax policymaking and international tax diplo- macy in this uncertain environment. To that end, Part I briefly describes four disparate background consider- ations that should inform our thinking. Part IA describes the decline of the arm’s-length standard, which under- pinned our historic understandings about how to attri- bute profits as among entities within a multinational corporation (“MNC”). I argue that internationally the arm’s-length standard as we knew it before the BEPS project is largely gone, and has been replaced by an unsustainable concept for profit attribution that I label the bourgeois labor theory of value (“BLTV”). Part IB describes the relationship between the arm’s-length stan- dard, jurisdiction to tax, and the attribution of profits to permanent establishments (“PE”). It highlights that under OECD principles, attribution of profits to PEs is accomplished through application of the OECD’s trans- fer pricing guidelines (“TPG”). Part IC recounts various acts of tax unilateralism abroad, often focused on the tech sector, and including the trend toward abandoning historic limits on jurisdiction to tax. Part ID describes the United States’ 2017 tax reform in that global context, with a particular focus on the global intangible low-taxed income (“GILTI”) and the BEAT. The remainder of the paper is intended as an explora- tion of the second (or third, or fourth) best. For purposes of this paper, I therefore do not analyze options that were considered and rejected in the most recent U.S. tax reform, including a destination-based cash flow tax or an integrated corporate tax system, and certain options that never made it into the most recent tax reform debate, such as adopting a VAT. The discussion is instead limited to three options that have been discussed in general terms in the current global debate. Each of these options preserves a classic corporate tax system that includes an entity-level tax on the normal return to capital. One further important caveat is that in this paper I attempt as best I can to fill in ideas that have been described with a very high level of generality with additional potential content, in order to motivate the analysis. Part II focuses on the European Commission and Her Majesty’s Treasury (“HMT”) stated view that user par- ticipation should be acknowledged as a source of value creation in the digital economy and concludes that the user participation concept has application well beyond the so-called digital economy. Applying the concept in a manner that is limited to the digital economy is intel- lectually indefensible; at most it amounts to mercantilist ring-fencing. The user participation theory does, however, have an important relationship to other more generally applica- ble proposals for international tax reform. In particular, it involves a shift toward destination-based income taxa- tion, in much the same manner as some other proposals for fundamental international income allocation reform, albeit only for one sector. At least two more comprehensive and principled pro- posals to reform the international tax system’s attribu- tion of profits are apparently now being considered at the OECD. These respectively are often loosely referred to by the monikers “marketing intangibles” and “minimum taxation.” As publicly described, these ideas seem to be at an early stage of development. Part III evaluates a version of the “marketing intan- gibles” idea which I label the destination-based residual market profit allocation (“DBRMPA”). Part IV evalu- ates a version of a minimum tax system that combines inbound and outbound measures, and which I label “minimum effective taxation.” Part III builds on the discussion about “where we go from here” in transfer pricing provided by Andrus and Oosterhuis in a paper for the 2016 University of Chicago conference. The DBRMPA is related to that conference discussion of two years ago. In particular, it represents a compromise between the present transfer pricing system and sales or destination-based reforms to the transfer pricing system described in the Andrus/ Oosterhuis paper. Part III concludes that splitting taxing rights over “excess” returns4 between the pres- ent transfer pricing system and a destination-based approached is complex. It creates new sources of poten- tial conflict as between sovereigns and as between sovereigns and multinationals. Moreover, some desti- nation specification problems for which solutions do not exist or at least are not widely known would need to be addressed. Finally, the DBRMPA likely requires extensive tax harmonization and information exchange; more so than a minimum tax approach. Importantly all of the above conclusions regarding a DBRMPA apply with equal rigor as technical critiques of user participa- tion. The difference is simply that a DBRMPA applies to the whole economy and therefore—unlike user par- ticipation—has some principled basis. If a DBRMPA were pursued, Part III suggests that a formulary mech- anism for doing so is the least technically challenging approach. Part IV builds on the discussion of the GILTI and the BEAT in Part I as well as other discussions of the pros and cons of those provisions in tax forums over the last year. Part IV postulates that there may be a more 41MARCH–APRIL 2019 sensible path for multilateral cooperation around min- imum effective taxation. This approach could be both responsive to the current global international tax debate and build on (and help repair) our 2017 international tax reform. I conclude that a minimum effective taxation approach would be preferable to a DBRMPA. I. Background A. The Decline of the Arm’s-Length Standard Article 9 of the OECD Model Tax Convention is intended to ensure that MNCs do not obtain inappro- priate tax advantages by pricing transactions within the group differently than independent enterprises would do at “arm’s length.” More than half of world trade is now intra-firm.5 Thus, more than half of world trade is sub- ject to transfer pricing. Under the arm’s-length principle, multinational groups are supposed to divide their income for tax purposes among affiliates in the different countries in which the MNC does business, in a way that is meant to emulate the results that would transpire if the transactions had occurred between independent enterprises.6 For most of the last 40 years, the arm’s- length principle represented a consensual solution reached among technicians for the problem of allocat- ing tax between different parts of an MNC.7 Although the mantra of “arm’s length” masked real disagreement, and members of the transfer pricing practitioner com- munity often held the view that there was substantial controversy as to the proper implementation of the arm’s-length standard, the range of interpretation was, in practice, reasonably narrow. Major transfer pricing disputes arose with regularity, but they were addressed within a framework that largely respected intercom- pany contracts and the concept of allocation of risk within a multinational group.8 In the last decade, however, the “arm’s-length stan- dard” became extraordinarily controversial.9 Transfer pricing even became the subject of contentious discus- sion among high-level elected officials with no tax exper- tise at all.10 Moreover, the so-called “stateless income”11 narrative became commonly accepted by tax policymak- ers in almost every developed economy. As a result, preexisting norms developed by the com- munity of transfer pricing specialists came under heavy and perhaps deserving scrutiny. Views around the level of deference to be given to intergroup contrac- tual arrangements in transfer pricing analyses diverged substantially, the consensus on the scope for recharac- terizing intergroup transactions frayed, the consensus on respecting intergroup equity contributions declined. Disputes among government officials about whether value creation in cross-border transactions undertaken by multinationals should be attributed to capital, labor, the market, user participation, or government support are now aired routinely.12 Enormous political pressures coming from the highest levels of government and the G-20 meant that some sort of outcome on transfer pricing was politically necessary as part of the BEPS project.13 Thus, in 2015, the BEPS project in effect endorsed the commonly held idea that the then-existing OECD TPG were broken. However, at the technical level bureaucrats failed to reach meaningful consensus on a clearly delineated alternative. The result was a reliance on high levels of constructive ambiguity buried in many pages of technocratic language in the transfer pricing outputs of the BEPS project.14 One phrase that captures this ambiguity is the com- mitment to “align income taxation with value creation.” Everyone agrees on the principle—but no one agrees what it means.15 Nevertheless, if there was one central theme to the BEPS transfer pricing guidance taken as a whole, it was to put great weight for purposes of allocating intangi- ble income and income associated with the contractual allocation of risk on “people functions.” The people functions of interest were activities by people who are of sufficiently high skill to engage in the development, enhancement, maintenance, protection, and exploita- tion of intangibles (the so-called “DEMPE functions”) as well as to be able to control financial risks, including those associated with the employment of intangibles. It is these people functions that the post-BEPS TPG treat as “meriting” the allocation of excess returns from intangibles. In contrast, contractual or legal ownership of an intangible is not particularly significant, nor is “routine” labor.16 I call this approach to transfer pricing the BLTV. The labor theory of value asserts that the value of a good or service is fully dependent upon the labor used in its production. This theory was an important lynchpin in the philosophical ideas of Karl Marx. In contrast, conventional capitalist economic theory relies on a theory of marginalism, in which the value of any good or service is thought to be determined by its marginal utility. Moreover, the pricing of a good or service is based on a relationship between that marginal utility, and the marginal productivity of all the factors of production required to produce the relevant good or service. In addition to labor, a key factor of produc- tion required to produce most goods and services is 42 INTERNATIONAL TAX JOURNAL MARCH–APRIL 2019 INTERNATIONAL TAXATION IN AN ERA OF DIGITAL DISRUPTION: ANALYZING THE CURRENT DEBATE capital—including real and intangible assets purchased with capital. The BLTV attributes profits quite heavily to the labor of certain highly educated workers who occupy upper middle management roles—roles and back- grounds broadly similar to those who negotiate transfer pricing rules for governments. The theoretical basis in economics for this BEPS transfer pricing settlement is unclear. It turns the Marxian labor theory of value on its head while being inconsistent with the conventional economic view, too. To my mind this feature makes it even less coherent than other possible bases for transfer pricing. In the 2013 to 2015 period, the BLTV clearly seemed like an attractive alternative theory to various govern- ment officials. It addressed the “cash box” problem of multinational income being parked in zero tax places like the Cayman Islands and Bermuda, while attributing income to what the relevant officials viewed as “mean- ingful” activity. However, the post-BEPS BLTV version of the OECD’s TPG, if implemented in good faith by tax administra- tions around the world, would effectively provide that an MNC can in various situations save hundreds of mil- lions or even billions of dollars by moving 20 or a 100 key jobs to a low-tax jurisdiction from a high-tax juris- diction. And many of those jurisdictions—Switzerland, Ireland, and increasingly the UK—are attractive places to live, with talented, high-skill labor pools already in place. Requiring that DEMPE activities be conducted in tax-favorable jurisdictions in order to justify income allocations to those jurisdictions encourages DEMPE jobs to move to those jurisdictions. This transfer pric- ing result—that income may be shifted by moving high- skilled jobs—is deeply geopolitically unstable. From the corporate perspective, there can be huge incentives to shift DEMPE jobs if enough tax liability rides on the decision. At the same time, large developed economies with higher tax rates simply will not accept an arrange- ment that sees them losing both tax revenue and head- quarters and R&D jobs. In providing the above critique regarding the BEPS transfer pricing settlement, I do not wish to be misunder- stood. Outside the transfer pricing area (BEPS Actions 8–10), I believe the BEPS project had many notable accomplishments. Global best practices and minimum standards were developed with respect to important issues like hybridity, interest expense deductions, infor- mation reporting, and more. The BEPS project certainly showed how soft law in the international tax space can be quite efficacious. But transfer pricing is sufficiently important that the failure to reach a sensible result in this space casts a shadow over the BEPS project generally. The failure to grapple in a sensible way with the ques- tions raised by transfer pricing is one important reason the post-BEPS environment is characterized by much of the global tax chaos the BEPS project was supposed to prevent.17 B. The Relationship Between the Arm’s- Length Standard, Jurisdiction to Tax, and the Attribution of Profits to PEs Tax treaties specify when an enterprise based in one state has a sufficient connection to another state to justify taxation by the latter state. Under Article 5 of the OECD Model Tax Convention, a sufficient con- nection exists when an enterprise resident in one state (the “residence state”) has a “permanent establishment” in another state (the “source state”). The PE threshold must be met before the source state may tax that enter- prise on active business income properly attributable to the enterprise’s activity in the source state. The PE rule encapsulated in Article 5 thus represents the basic international standard governing jurisdiction to tax a non-resident enterprise. Under Article 7 of the OECD’s Model Tax Convention, profits attributable to a PE are those that the PE would have derived if it were a separate and independent enter- prise performing the activities which cause it to be a PE.18 In 2010, the OECD issued a report on the attribution of profits to PEs. The report concluded that a PE should be treated as if it were distinct and separate from its overseas head office; and that assets and risks should be attributed to the PE or the head office in line with the location of “significant people functions.” The post-2010 OECD approach to attributing prof- its to a PE is commonly referred to as the Authorized OECD Approach (“AOA”).19 This approach is based on the adoption of the 2010 version of the business profits article (Article 7) of the OECD Model Tax Convention. Step one of the AOA leads to the recog- nition of internal dealings between the PE and its head office.20 Then, under step two, the guidance in the OECD’s TPG is applied by analogy to determine the arm’s-length pricing of the internal dealing between the PE and the head office.21 The 2010 report on the AOA made clear that as the TPG were modified in the future, the AOA should be applied “by taking into account the guidance in the Guidelines as so modified from time to time.”22 43MARCH–APRIL 2019 In the BEPS project, many countries focused on the idea that technological progress (especially the Internet) and the globalization of business have made it easier to be heavily involved in the economic life of another juris- diction without meeting the historic PE threshold. In the end the BEPS project produced some notable changes to the PE threshold.23 These changes to Article 5 of the OECD Model Tax Convention are now being transposed into the global tax treaty network via the multilateral instrument, which itself represents another success of the BEPS project. Importantly, however, the BEPS project concluded that the AOA did not need to be revisited in light of the changes to Article 5. Fundamentally, the AOA was developed because if associated enterprises in different countries were taxed under the arm’s-length standard under Article 9, but PEs were taxed under some other rule under Article 7, dis- tortions between structures involving PEs and structures involving subsidiaries would arise. As a result, the OECD Model Tax Convention attempts to apply the TPG and the arm’s-length principle as consistently as possible in both cases.24 Applying the AOA means that the PE and its head office are treated like independent enterprises. Note, however, that modern tax treaty PE tests are built to a significant degree on an underlying idea of dependence that differs from dependence/independence of owner- ship.25 Thus, the AOA taxes a PE as if the PE and its head office are independent enterprises, but by definition a dependent agent PE requires dependence. This paradox is a product of the decision to have the transfer pricing rules trump the PE rules and make the arm’s-length stan- dard the central organizing principle.26 As a result, in our current legal construct, discussing the attribution of profits to a PE requires discussing which rules we wish to use to allocate MNE profits generally. The alternative to the dependency criteria for estab- lishing the existence of a PE is physical presence. Arguably, that mechanism for establishing a PE is just a proxy for meaningful presence in the economic life of a jurisdiction through dependent agents. Historically the physical presence rule was also a pragmatic admin- istrative consideration. The physical presence of either an enterprise or a dependent agent of the enterprise was necessary in order to collect tax revenues from a tax- payer. Today, however, the pragmatic consideration is much less important in business-to-business transac- tions, given the development of reverse-charging type mechanisms and the ability to require a resident busi- ness to withhold from a non-resident. Moreover, in the Internet era, it seems to me a losing argument to suggest that large digital firms do not have a meaningful global presence. So the principled debate with respect to juris- diction to tax and attribution of profits to PEs is just the debate about how to allocate the profits of an MNE among jurisdictions generally.27 C. The Rise of International Tax Unilateralism and the Push to Tax Big Tech Many jurisdictions decided quite quickly that they were not satisfied with the BEPS transfer pricing outcomes, at least with respect to specific companies or sectors where they wished to collect more revenue. The marquee actor in this story is the United Kingdom. In 2015, before the BEPS project had ended, the United Kingdom imposed a 25\% tax on profits deemed to be ar- tificially diverted away from the UK. The Diverted Profit Tax (“DPT”) targets instances where, under existing PE rules, an MNC legitimately avoids a UK taxable pres- ence, despite the fact that the MNC is supplying goods or services to UK customers. The UK took the position that the DPT was not covered by the United Kingdom’s income tax treaties, and therefore that the PE rules tax treaties specify as to when a state has jurisdiction to tax an enterprise based in another state did not apply to the DPT. The primary justification for OECD countries rec- ommending and the G-20 launching the BEPS project had been to develop rules-based multilateral reforms that would prevent unilateral actions by the countries partic- ipating in the BEPS project. The UK adopted the DPT at the same time that it was helping lead the BEPS proj- ect. The UK’s decision both to lead a multilateral project that was supposed to set internationally agreed rules that would prevent inconsistent unilateral action, and at the same time unilaterally adopt the DPT, a tax that was not consistent with BEPS, was broadly perceived as a signif- icant blow to tax multilateralism. The decision treated sovereignty as a license for organized hypocrisy. But for the DPT, one could imagine that a more cooperative international tax environment might have evolved out of the BEPS project.28 Under the DPT, Her Majesty’s Revenue and Customs (“HMRC”) can choose which companies it wishes to pursue and to what degree.29 Thus, the DPT also struck a blow against non-discrimination principles in international taxation. Indeed, in press interviews UK government officials referred to the DPT simply as the “Google Tax.”30 The extent to which the DPT is an arbitrary levy on targets of interest to HMRC is well-il- lustrated by the 12-fold increase in revenues raised by the DPT between 2015/2016 and 2017/2018.31 44 INTERNATIONAL TAX JOURNAL MARCH–APRIL 2019 INTERNATIONAL TAXATION IN AN ERA OF DIGITAL DISRUPTION: ANALYZING THE CURRENT DEBATE Twelve-fold increases in revenue without a change in the rate or rules simply do not happen when tax law functions in the normal way.32 Following the UK’s lead, by late 2017, countries as diverse as Australia, Argentina, Chile, France, India, Israel, Italy, Japan, Mexico, New Zealand, Poland, Spain, and Uruguay had taken unilateral actions not limited by or consistent with the BEPS agreements. These mea- sures are generally designed to increase levels of inbound corporate income taxation. Many are structured so that, as a practical matter, they primarily affect U.S. MNCs. Among other examples, in 2016 Australia enacted a DPT- like measure with a 40\% tax rate (also publicly known as the “Google Tax”). India imposed a 6\% “equalization levy” on outbound payments to non-resident companies for digital advertising services. India’s legislation autho- rized extending the tax to all digital services by admin- istrative action. The Israel Tax Authority announced an interpretation of Israeli law that significantly reduces the level of physical presence necessary for direct taxation of non-resident digital companies. The Korean government is considering amendments to the Korean Corporate Tax Act to override Korean tax treaties and treat “global information and communications technology com- panies” as having a digital Korean PE. Uruguay has enacted, and Argentina is considering, measures similar to those adopted in India. During this same time period the Directorate-General for Competition (“DG Comp”) at the European Commission reconceptualized its “state aid” concept in the international tax context, notably by claiming that DG Comp was not limited by the OECD’s arm’s-length standard in determining whether tax rulings were consistent with EU law.33 More recently, governments around the world have been proposing or enacting taxes targeted specifically at digital advertising and online platforms. India went first with its previously-mentioned tax on digital advertising. Then, in September 2017, the European Commission called for new international rules that would alter the application of PE and transfer pricing rules for the digi- tal economy alone.34 Moreover, the Commission argued that until such time as a digital-specific reform of the international tax system was agreed upon, an interim tax based on turnover, or a withholding mechanism, should be imposed on digital platform companies.35 The UK fol- lowed up on the Commission’s digital tax proposals with its own position paper on corporation tax and the digital economy.36 On October 29, 2018, the UK announced the introduction of a “digital services tax” that is based on turnover and is explicitly ring-fenced to hit only large search engine, social media, and online marketplace businesses.37 Other unilateral measures focusing on the digital economy have been taken by India (significant economic presence PE),38 Israel (digital PE), and others. Like the earlier round of unilateral measures, some of these proposals have been described both in government documents and in the media as taxes targeting “GAFA:” Google, Apple, Facebook, and Amazon. However, the proposals generally are structured to have an impact beyond those four corporations. Separately, in 2017 Germany adopted its “Act against Harmful Tax Practices with regard to Licensing of Rights.” New section 4j of the German Income Tax Act restricts deductions for royalties and similar payments made to related parties if such payments are subject to a non-OECD compliant preferential tax regime and are taxed at an effective rate below 25\%.39 The provision also includes a conduit rule along the same general lines as U.S. code provision section 7701(l).40 In 2017 the UK also opened consultations on a royalty withholding tax proposal, which is now scheduled to be enacted and in force from April 6, 2019.41 This withhold- ing tax would generally apply where a non-UK entity making sales in the UK does not have a taxable presence in the UK. Withholding is also extended to payments for the right to distribute goods or perform specified ser- vices in the UK. Since there is no UK entity making a payment, the proposal applies almost exclusively to cases where a non-UK company selling to UK customers pays a royalty to a 3rd country jurisdiction. HMT describes the proposal as a step to tax the digital economy, but acknowledges that it has application beyond the digital sector. For example, imagine a Brazilian MNC has a sub- sidiary in Ireland making sales in the UK and paying a royalty to an entity in the Cayman Islands. Under these proposals, the UK would be trying to withhold from the royalty paid from Ireland to the Cayman Islands. The proposal thus raises the enforcement issues raised in the canonical SDI Netherlands case. Realistically, more unilateral measures to increase source country taxation, market country taxation, or both are coming. … Form 1118 (Rev. December 2020) Department of the Treasury Internal Revenue Service Foreign Tax Credit—Corporations ▶ Attach to the corporation’s tax return. ▶ Go to www.irs.gov/Form1118 for instructions and the latest information. For calendar year 20 , or other tax year beginning , 20 , and ending , 20 OMB No. 1545-0123 Attachment Sequence No. 118 Name of corporation Employer identification number Use a separate Form 1118 for each applicable category of income (see instructions). a Separate Category (Enter code—see instructions.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ b If code 901j is entered on line a, enter the country code for the sanctioned country (see instructions) . . . . . . . . . . . . . . ▶ c If one of the RBT codes is entered on line a, enter the country code for the treaty country (see instructions) . . . . . . . . . . . . ▶ Schedule A Income or (Loss) Before Adjustments (Report all amounts in U.S. dollars. See Specific Instructions.) 1. EIN or Reference ID Number (see instructions)* 2. Foreign Country or U.S. Possession (enter two-letter code—use a separate line for each) (see instructions) Gross Income or (Loss) From Sources Outside the United States 3. Inclusions Under Sections 951(a)(1) and 951A (see instructions) 4. Dividends (see instructions) 5. Interest (a) Exclude Gross-Up (b) Gross-Up (section 78) (a) Exclude Gross-Up (b) Gross-Up (section 78) A B C Totals (add lines A through C) . . . . . . . ▶ 6. Gross Rents, Royalties, and License Fees 7. Sales 8. Gross Income From Performance of Services 9. Section 986(c) Gain 10. Section 987 Gain 11. Section 988 Gain 12. Other (attach schedule) A B C Totals 13. Total (add columns 3(a) through 12) 14. Allocable Deductions (a) Dividends Received Deduction (see instructions) (b) Deduction Allowed Under Section 250(a)(1)(A)—Foreign Derived Intangible Income (c) Deduction Allowed Under Section 250(a)(1)(B)—Global Intangible Low-Taxed Income Rental, Royalty, and Licensing Expenses (d) Depreciation, Depletion, and Amortization (e) Other Allocable Expenses (f) Expenses Allocable to Sales Income A B C Totals 14. Allocable Deductions (continued) (g) Expenses Allocable to Gross Income From Performance of Services (h) Other Allocable Deductions (attach schedule) (see instructions) (i) Total Allocable Deductions (add columns 14(a) through 14(h)) 15. Apportioned Share of Deductions (enter amount from applicable line of Schedule H, Part II, column (d)) 16. Net Operating Loss Deduction 17. Total Deductions (add columns 14(i) through 16) 18. Total Income or (Loss) Before Adjustments (subtract column 17 from column 13) A B C Totals * For section 863(b) income, NOLs, income from RICs, high-taxed income, section 965, section 951A, and reattribution of income by reason of disregarded payments, use a single line (see instructions). Also, for reporting branches that are QBUs, use a separate line for each such branch. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 10900F Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 2 Schedule B Foreign Tax Credit (Report all foreign tax amounts in U.S. dollars.) Part I—Foreign Taxes Paid, Accrued, and Deemed Paid (see instructions) 1. Credit Is Claimed for Taxes (check one): Paid Accrued 2. Foreign Taxes Paid or Accrued (attach schedule showing amounts in foreign currency and conversion rate(s) used) Tax Withheld at Source on: (a) Dividends (b) Distributions of Previously Taxed Earnings and Profits (c) Branch Remittances (d) Interest (e) Rents, Royalties, and License Fees (f) Other Date Paid Date Accrued A B C Totals (add lines A through C) . ▶ 2. Foreign Taxes Paid or Accrued (attach schedule showing amounts in foreign currency and conversion rate(s) used) Other Foreign Taxes Paid or Accrued on: (g) Sales (h) Services Income (i) Other (j) Total Foreign Taxes Paid or Accrued (add columns 2(a) through 2(i)) 3. Tax Deemed Paid (see instructions) A B C Totals Part II—Separate Foreign Tax Credit (Complete a separate Part II for each applicable category of income.) 1a Total foreign taxes paid or accrued (total from Part I, column 2(j)) . . . . . . . . . . . . . . . . . . . . . . . b Foreign taxes paid or accrued by the corporation during prior tax years that were suspended due to the rules of section 909 and for which the related income is taken into account by the corporation during the current tax year (see instructions) . . . . . . . . 2 Total taxes deemed paid (total from Part I, column 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Reductions of taxes paid, accrued, or deemed paid (enter total from Schedule G) . . . . . . . . . . . . . . . . . . ( ) 4 Taxes reclassified under high-tax kickout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Enter the sum of any carryover of foreign taxes (from Schedule K, line 3, column (xiv), and from Schedule I, Part III, line 3) plus any carrybacks to the current tax year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Total foreign taxes (combine lines 1a through 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Enter the amount from the applicable column of Schedule J, Part I, line 11 (see instructions). If Schedule J is not required to be completed, enter the result from the “Totals” line of column 18 of the applicable Schedule A . . . . . . . . . . . . . . . . . . . . . . . . . . . 8a Total taxable income from all sources (enter taxable income from the corporation’s tax return) . . . . . . . . . . . . . . b Adjustments to line 8a (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c Subtract line 8b from line 8a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Divide line 7 by line 8c. Enter the resulting fraction as a decimal (see instructions). If line 7 is greater than line 8c, enter 1 . . . . . . . . . . . 10 Total U.S. income tax against which credit is allowed (regular tax liability (see section 26(b)) minus any American Samoa economic development credit) 11 Multiply line 9 by line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Increase in limitation (section 960(c)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Credit limitation (add lines 11 and 12) (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Separate foreign tax credit (enter the smaller of line 6 or line 13). Enter here and on the appropriate line of Part III . . . . . . . . . . . . ▶ Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 3 Schedule B Foreign Tax Credit (continued) (Report all foreign tax amounts in U.S. dollars.) Part III—Summary of Separate Credits (Enter amounts from Part II, line 14 for each applicable category of income. Do not include taxes paid to sanctioned countries.) 1 Credit for taxes on section 951A category income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Credit for taxes on foreign branch category income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Credit for taxes on passive category income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Credit for taxes on general category income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Credit for taxes on section 901(j) category income (combine all such credits on this line) . . . . . . . . . . . . . . . . 6 Credit for taxes on income re-sourced by treaty (combine all such credits on this line) . . . . . . . . . . . . . . . . 7 Total (add lines 1 through 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Reduction in credit for international boycott operations (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Total foreign tax credit (subtract line 8 from line 7). Enter here and on the appropriate line of the corporation’s tax return . . . . . . . . . ▶ Schedule C Tax Deemed Paid With Respect to Section 951(a)(1) Inclusions by Domestic Corporation Filing Return (Section 960(a)) Use this schedule to report the tax deemed paid by the corporation with respect to section 951(a)(1) inclusions of earnings from foreign corporations under section 960(a). For each line in Schedule C, include the column 10 amount in column 3 of the line in Schedule B, Part I that corresponds with the identifying number specified in column 1 of Schedule A and that also corresponds with the identifying number entered in column 1b of this Schedule C (see instructions). 1a. Name of Foreign Corporation 1b. EIN or Reference ID Number of the Foreign Corporation (see instructions) 1c. QBU Reference ID (if applicable) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code—see instructions) 4. Functional Currency of Foreign Corporation (enter code - see instructions) 5. Subpart F Income Group (a) Reg. sec. 1.960-1(d) (2)(ii)(B)(2)(enter code) (b) Reg. sec. 1.904-4(c) (3)(i)-(iv) (enter code) (c) Unit 6. Total Net Income in Subpart F Income Group (in functional currency of foreign corporation) 7. Total Current Year Taxes in Subpart F Income Group (in U.S. Dollars) 8. Section 951(a)(1) Inclusion Attributable to Subpart F Income Group (a) Functional Currency (b) U.S. Dollars 9. Divide column 8(a) by column 6 10. Tax Deemed Paid (multiply column 7 by column 9) Total (add amounts in column 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 4 Schedule D Tax Deemed Paid With Respect to Section 951A Income by Domestic Corporation Filing the Return (Section 960(d)) Use this schedule to figure the tax deemed paid by the corporation with respect to section 951A inclusions of earnings from foreign corporations under section 960(d). Part I—Foreign Corporation’s Tested Income and Foreign Taxes 1a. Name of Foreign Corporation 1b. EIN or Reference ID Number of the Foreign Corporation (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Functional Currency of Foreign Corporation (enter code) 5. Pro rata share of CFC’s tested income from applicable Form 8992 schedule (see instructions) 6. CFC’s tested income from applicable Form 8992 schedule (see instructions) 7. Divide column 5 by column 6 8. CFC’s tested foreign income taxes from Schedule Q (Form 5471) (see instructions) 9. Pro rata share of tested foreign income taxes paid or accrued by CFC (Multiply amount in column 7 by amount in column 8) Total (add amounts in column 5) . . . . . . . . . . . . . . . . . . . . ▶ Total (add amounts in column 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Part II—Foreign Income Tax Deemed Paid 1. Global Intangible Low-Taxed Income (Section 951A Inclusion) 2. Inclusion Percentage. Divide Part II, Column 1, by Part I, Column 5 Total 3. Multiply Part I, Column 9 Total, by Part II, Column 2 Percentage 4. Tax Deemed Paid (Multiply Part II, column 3, by 80\%. Enter the result here and include on the line of Schedule B, Part I, column 3 that corresponds with the line with “951A” in column 2 of Schedule A.) Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 5 Schedule E Tax Deemed Paid With Respect to Previously Taxed Earnings and Profits (PTEP) by Domestic Corporation Filing the Return (Section 960(b)) Part I—Tax Deemed Paid by Domestic Corporation Use this part to report the tax deemed paid by the domestic corporation with respect to distributions of PTEP from first-tier foreign corporations under section 960(b). For each line in Schedule E, Part I, include the column 11 amount in column 3 of the line in Schedule B, Part I that corresponds with the identifying number specified in column 1 of Schedule A and that also corresponds with the identifying number specified in column 1b of this Schedule E, Part I (see instructions). 1a. Name of Distributing Foreign Corporation 1b. EIN or Reference ID Number of the Foreign Corporation (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Functional Currency of the Distributing Foreign Corporation 5. PTEP Group (enter code) 6. Annual PTEP account (enter year) 7. Total amount of PTEP in the PTEP Group 8. Total amount of the PTEP group taxes with respect to PTEP group 9. Distribution from the PTEP Group 10. Divide column 9 by column 7 11. Foreign income taxes properly attributable to PTEP and not previously deemed paid (multiply column 8 by column 10) Total (add amounts in column 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Part II—Tax Deemed Paid by First- and Lower-Tier Foreign Corporations Use this part to report the tax deemed paid by a foreign corporation with respect to distributions of PTEP from lower-tier foreign corporations under section 960(b) that relate to distributions reported in Part I (see instructions). 1a. Name of Distributing Foreign Corporation 1b. EIN or Reference ID Number of the Foreign Corporation (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code—see instructions) 4a. Name of Recipient Foreign Corporation 4b. EIN or Reference ID Number of the Foreign Corporation (see instructions) 5. Tax Year End (Year/Month) (see instructions) 6. Country of Incorporation (enter country code—see instructions) 7. Functional Currency of the Distributing Foreign Corporation 8. PTEP Group (enter code) 9. Annual PTEP account (enter year) 10. Total Amount of PTEP in the PTEP Group 11. Total Amount of the PTEP group taxes with respect to PTEP group 12. PTEP Distributed 13. Divide column 12 by column 10 14. Foreign income taxes properly attributable to PTEP and not previously deemed paid (multiply column 11 by column 13) Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 6 Schedule F-1 Tax Deemed Paid by Domestic Corporation Filing Return—Pre-2018 Tax Years of Foreign Corporations Use this schedule to figure the tax deemed paid by the corporation with respect to dividends from a first-tier foreign corporation under section 902(a), and deemed inclusions of earnings from a first- or lower-tier foreign corporation under section 960(a). Report all amounts in U.S. dollars unless otherwise specified. IMPORTANT: Applicable to dividends or inclusions from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend or inclusion, do not complete Schedule F-1 (see instructions). Part I—Dividends and Deemed Inclusions From Post-1986 Undistributed Earnings For each line in Schedule F-1, Part I, include the column 12 amount in column 3 of the line in Schedule B, Part I that corresponds with the identifying number specified in column 1 of Schedule A and that also corresponds with the identifying number specified in either column 1b or 1c of this Schedule F-1, Part I (see instructions). 1a. Name of Foreign Corporation (identify DISCs and former DISCs) 1b. EIN (if any) of the Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code—see instructions) 4. Post-1986 Undistributed Earnings (in functional currency) (attach schedule) 5. Opening Balance in Post-1986 Foreign Income Taxes 6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (a) Taxes Paid (b) Taxes Deemed Paid (see instructions) 7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and 6(b)) 8. Dividends and Deemed Inclusions (a) Functional Currency (b) U.S. Dollars 9. Divide Column 8(a) by Column 4 10. Multiply Column 7 by Column 9 11. Section 960(c) Limitation 12. Tax Deemed Paid (subtract column 11 from column 10) Total (add amounts in column 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 7 Schedule F-1 Tax Deemed Paid by Domestic Corporation Filing Return—Pre-2018 Tax Years of Foreign Corporations (continued) IMPORTANT: Applicable to dividends or inclusions from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend or inclusion, do not complete Schedule F-1 (see instructions). Part II—Dividends Paid Out of Pre-1987 Accumulated Profits For each line in Schedule F-1, Part II, include the column 8(b) amount in column 3 of the line in Schedule B, Part I that corresponds with the identifying number specified in column 1 of Schedule A and that also corresponds with the identifying number specified in either column 1b or 1c of this Schedule F-1, Part I (see instructions). 1a. Name of Foreign Corporation (identify DISCs and former DISCs) 1b. EIN (if any) of the Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Accumulated Profits for Tax Year Indicated (in functional currency computed under section 902) (attach schedule) 5. Foreign Taxes Paid and Deemed Paid on Earnings and Profits (E&P) for Tax Year Indicated (in functional currency) (see instructions) 6. Dividends Paid (a) Functional Currency (b) U.S. Dollars 7. Divide Column 6(a) by Column 4 8. Tax Deemed Paid (see instructions) (a) Functional Currency (b) U.S. Dollars Total (add amounts in column 8b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Part III—Deemed Inclusions From Pre-1987 Earnings and Profits For each line in Schedule F-1, Part III, include the column 8 amount in column 3 of the line in Schedule B, Part I that corresponds with the identifying number specified in column 1 of Schedule A and that also corresponds with the identifying number specified in either column 1b or 1c of this Schedule F-1, Part I (see instructions). 1a. Name of Foreign Corporation (identify DISCs and former DISCs) 1b. EIN (if any) of the Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. E&P for Tax Year Indicated (in functional currency translated from U.S. dollars, computed under section 964) (attach schedule) 5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (see instructions) 6. Deemed Inclusions (a) Functional Currency (b) U.S. Dollars 7. Divide Column 6(a) by Column 4 8. Tax Deemed Paid (multiply column 5 by column 7) Total (add amounts in column 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 8 Schedule F-2 Tax Deemed Paid by First- and Second-Tier Foreign Corporations Under Section 902(b)—Pre-2018 Tax Years of Foreign Corporations Use Part I to compute the tax deemed paid by a first-tier foreign corporation with respect to dividends from a second-tier foreign corporation. Use Part II to compute the tax deemed paid by a second-tier foreign corporation with respect to dividends from a third-tier foreign corporation. Report all amounts in U.S. dollars unless otherwise specified. IMPORTANT: Applicable to dividends from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend, do not complete Schedule F-2 (see instructions). Part I—Tax Deemed Paid by First-Tier Foreign Corporations Section A—Dividends Paid Out of Post-1986 Undistributed Earnings (Include the column 10 results in Schedule F-1, Part I, column 6(b).) 1a. Name of Second-Tier Foreign Corporation and Its Related First-Tier Foreign Corporation 1b. EIN (if any) of the Second-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Accumulated Profits for Tax Year Indicated (in functional currency— see instructions) 5. Opening Balance Post-1986 Foreign Income Taxes 6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (a) Taxes Paid (b) Taxes Deemed Paid (see instructions) 7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and 6(b)) 8. Dividends Paid (in functional currency) (a) of Second-Tier Corporation (b) of First-Tier Corporation 9. Divide Column 8(a) by Column 4 10. Tax Deemed Paid (multiply column 7 by column 9) Section B—Dividends Paid Out of Pre-1987 Accumulated Profits (Include the column 8(b) results in Schedule F-1, Part I, column 6(b).) 1a. Name of Second-Tier Foreign Corporation and Its Related First-Tier Foreign Corporation 1b. EIN (if any) of the Second-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Accumulated Profits for Tax Year Indicated (in functional currency— attach schedule) 5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (in functional currency— see instructions) 6. Dividends Paid (in functional currency) (a) of Second-Tier Corporation (b) of First-Tier Corporation 7. Divide Column 6(a) by Column 4 8. Tax Deemed Paid (see instructions) (a) Functional Currency of Second-Tier Corporation (b) U.S. Dollars Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 9 Schedule F-2 Tax Deemed Paid by First- and Second-Tier Foreign Corporations Under Section 902(b)—Pre-2018 Tax Years of Foreign Corporations (continued) IMPORTANT: Applicable to dividends from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend, do not complete Schedule F-2 (see instructions). Part II—Dividends Deemed Paid by Second-Tier Foreign Corporations Section A—Dividends Paid Out of Post-1986 Undistributed Earnings (In general, include the column 10 results in Section A, column 6(b), of Part I. However, see instructions for Schedule F-1, Part I, column 6(b), for an exception.) 1a. Name of Third-Tier Foreign Corporation and Its Related Second-Tier Foreign Corporation 1b. EIN (if any) of the Third-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Post-1986 Undistributed Earnings (in functional currency— attach schedule) 5. Opening Balance in Post-1986 Foreign Income Taxes 6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (a) Taxes Paid (b) Taxes Deemed Paid (from Schedule F-3, Part I, column 10) 7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and 6(b)) 8. Dividends Paid (in functional currency) (a) of Third-Tier Corporation (b) of Second-Tier Corporation 9. Divide Column 8(a) by Column 4 10. Tax Deemed Paid (multiply column 7 by column 9) Section B—Dividends Paid Out of Pre-1987 Accumulated Profits (In general, include the column 8(b) results in Section A, column 6(b), of Part I. However, see instructions for Schedule F-1, Part I, column 6(b) for an exception.) 1a. Name of Third-Tier Foreign Corporation and Its Related Second-Tier Foreign Corporation 1b. EIN (if any) of the Third-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Accumulated Profits for Tax Year Indicated (in functional currency— attach schedule) 5. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (in functional currency— see instructions) 6. Dividends Paid (in functional currency) (a) of Third-Tier Corporation (b) of Second-Tier Corporation 7. Divide Column 6(a) by Column 4 8. Tax Deemed Paid (see instructions) (a) Functional Currency of Third-Tier Corporation (b) U.S. Dollars Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 10 Schedule F-3 Tax Deemed Paid by Certain Third-, Fourth-, and Fifth-Tier Foreign Corporations Under Section 902(b)—Pre-2018 Tax Years of Foreign Corporations Use this schedule to report taxes deemed paid with respect to dividends from eligible post-1986 undistributed earnings of fourth-, fifth-, and sixth-tier controlled foreign corporations. Report all amounts in U.S. dollars unless otherwise specified. IMPORTANT: Applicable to dividends from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend, do not complete Schedule F-3 (see instructions). Part I—Tax Deemed Paid by Third-Tier Foreign Corporations (In general, include the column 10 results in Schedule F-2, Part II, Section A, column 6(b). However, see instructions for Schedule F-1, Part I, column 6(b), for an exception.) 1a. Name of Fourth-Tier Foreign Corporation and Its Related Third-Tier Foreign Corporation 1b. EIN (if any) of the Fourth-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Post-1986 Undistributed Earnings (in functional currency— attach schedule) 5. Opening Balance in Post-1986 Foreign Income Taxes 6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (a) Taxes Paid (b) Taxes Deemed Paid (from Part II, column 10) 7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and 6(b)) 8. Dividends Paid (in functional currency) (a) of Fourth-Tier CFC (b) of Third-Tier CFC 9. Divide Column 8(a) by Column 4 10. Tax Deemed Paid (multiply column 7 by column 9) Form 1118 (Rev. 12-2020) Form 1118 (Rev. 12-2020) Page 11 Schedule F-3 Tax Deemed Paid by Certain Third-, Fourth-, and Fifth-Tier Foreign Corporations Under Section 902(b)—Pre-2018 Tax Years of Foreign Corporations (continued) IMPORTANT: Applicable to dividends from tax years of foreign corporations beginning on or before December 31, 2017. If taxpayer does not have such a dividend, do not complete Schedule F-3 (see instructions). Part II—Tax Deemed Paid by Fourth-Tier Foreign Corporations (In general, include the column 10 results in column 6(b) of Part I. However, see instructions for Schedule F-1, Part I, column 6(b), for an exception.) 1a. Name of Fifth-Tier Foreign Corporation and Its Related Fourth-Tier Foreign Corporation 1b. EIN (if any) of the Fifth-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Post-1986 Undistributed Earnings (in functional currency— attach schedule) 5. Opening Balance in Post-1986 Foreign Income Taxes 6. Foreign Taxes Paid and Deemed Paid for Tax Year Indicated (a) Taxes Paid (b) Taxes Deemed Paid (from Part III, column 10) 7. Post-1986 Foreign Income Taxes (add columns 5, 6(a), and 6(b)) 8. Dividends Paid (in functional currency) (a) of Fifth-Tier CFC (b) of Fourth-Tier CFC 9. Divide Column 8(a) by Column 4 10. Tax Deemed Paid (multiply column 7 by column 9) Part III—Tax Deemed Paid by Fifth-Tier Foreign Corporations (In general, include the column 10 results in column 6(b) of Part II, above. However, see instructions for Schedule F-1, Part I, column 6(b), for an exception.) 1a. Name of Sixth-Tier Foreign Corporation and Its Related Fifth-Tier Foreign Corporation 1b. EIN (if any) of the Sixth-Tier Foreign Corporation 1c. Reference ID Number (see instructions) 2. Tax Year End (Year/Month) (see instructions) 3. Country of Incorporation (enter country code— see instructions) 4. Post-1986 Undistributed Earnings (in functional currency— attach schedule) 5. Opening Balance in Post-1986 Foreign Income Taxes 6. Foreign Taxes … 7SEPTEMBER–OCTOBER 2018 © 2018 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. Choice Of Entity Corner S Corporations and the New International Tax Provisions of the TCJA By Joseph E. Tierney III O ver the course of the years, many of my clients have operated as S cor-porations. Where they have had international operations, my primary concern has been to make sure that their foreign subsidiaries are organized in the countries in which their principal manufacturing or production operations are located. In short, I’ve tried to be sure that these subsidiaries haven’t generated subpart F income. None of this has engaged choice of entity considerations. But the new foreign tax provisions of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) now very directly engage choice of entity issues. The purpose of this col- umn is to explore some of the implications of these provisions for S corporations and whether a domestic C corporation should be introduced into the group headed by an S corporation to hold the shares of controlled foreign corporations (“CFCs”). Let’s use an example to work our way through these issues. Assume XYZ is an S corporation. It owns all the stock of several CFCs incorporated and operating in The Peoples Republic of Shangri-La. These entities have not generated subpart F income up to now because their principal production and sales operations are located in Shangri-La and they are incorporated in Shangri-La. We’ll assume that these CFCs have on November 5, 2017, and December 31, 2017, $10,000,000 of earnings and profits (“E&P”) that has not been taxed under subpart F and are not “effectively connected” to a U.S. trade or business. So, how is XYZ affected by the provisions of the TCJA? The basic concept underlying the new law is the establishment of a territorial tax system. The key notion is that, in the future, earnings of our Shangri-La subsidiaries would be taxed only in Shangri-La, and when earnings are “repatriated” through dividends, those dividends will not be taxed in the United States.1 To achieve this, the TCJA created Code Sec. 245A. It establishes a 100\% deduction for dividends received by a “specified shareholder” from the foreign source E&P of a foreign corporation (called the “participation deduction”). A “specified shareholder” is a domestic C corporation that owns 10\% or more of a foreign corporation other than a “passive foreign investment corporation”—an exception I’ll ignore in this column. Code Sec. 246(c)(5) creates a holding period rule (366 days of a 731-day period hav- ing the ex-dividend date in the middle) that wouldn’t be a problem for us. But, unfortunately, this deduction is not available to S corporations or their shareholders. To help pay for this new approach, under new Code Sec. 965, each 10\% shareholder of a “specified foreign corporation” (generally, a CFC or a foreign corporation having a domestic corporation as a shareholder) having “deferred JOSEPH E. TIERNEY III is a Shareholder of Meissner Tierney Fisher & Nichols S.C. in Milwaukee, Wisconsin. ENTITY CHOICE CORNER foreign income” (essentially, post-86 E&Ps that weren’t taxed under subpart F or “effectively connected” to a U.S. trade or business) must include in the shareholder’s 2017 return an amount equal to the shareholder’s pro rata share of “accumulated deferred post 1986 foreign income” of such corporations. These corporations are called “deferred foreign income corporations” (“DFICs”) in the statute. The required inclusion is through the mechanics of subpart F. In effect, the amount that is to be taxed under Code Sec. 965 becomes subpart F income included under Code Sec. 951. This inclusion is required of all types of shareholders of DFICs, including C corporations and S corporations, as well as individuals, partnerships and trusts. So, XYZ’s shareholders must pick up $10,000,000 as taxable income for 2017 through subpart F (specifically Code Sec. 951). There are two ironies for my S corporation clients in this. First, all the good work done to make sure that their foreign subsidiaries did not generate subpart F income seems wasted because the shareholders of these corpora- tions must include all the deferred income accumulated over the course of the years in their respective 2017 tax returns—a feature shared with all other types of sharehold- ers of DFICs. Second, they won’t have the benefit of the participation dividend deduction going forward because the dividends that would otherwise constitute participa- tion dividends are taxable to S corporations—which is not the case for C corporation shareholders. There are, however, three important relief provisions at work in Code Sec. 965, and one significant benefit from its application. Let’s start with the relief provisions. First, reduced tax rates are applicable. The rates are scaled down to 15.5\% for the “cash position” of the foreign subsidiary corporations and 8\% for other assets (the balance), and the foreign tax credit (to the extent available) is similarly scaled down. But this scale down is measured against the maximum corporate rate for 2017 (35\%), and so, for S corporation shareholders, this translates to reduced rates of roughly 17.5\% for cash assets and roughly 9.1\% for non- cash assets.2 There are extensive provisions dealing with the distinction between a foreign corporation’s cash posi- tion and its non-cash assets. And notice that the “blocked currency” rules under Code Sec. 964(b) could operate to convert what are “cash assets” into “non-cash assets.” Second, under Code Sec. 965(h), each taxpayer may elect an eight-year deferred payout of the tax attributable to the Code Sec. 965 inclusion (8\% for each of the first five years, then 15\% in the sixth year, 20\% in the 7th year and 25\% in the 8th year). See new Proposed Reg. §1.965-7(b) for details, including provisions for a “consent agreement,” a description of “acceleration events” that will terminate deferral, and an exception that will forestall acceleration for certain events if there is a “section 965(h) eligible transferee” who signs a “transfer agreement.” Heads up estate planners; death is an acceleration event and the exception does not seem available. Third, under Code Sec. 965(i), shareholders of S cor- porations may elect permanent deferral until a “triggering event.” The statute imposes joint liability for the deferred tax on the S corporation and requires annual reporting. The triggering events include (i) loss of S status (though reinstatement where the termination is inadvertent will apparently forestall the triggering event), (ii) sale of “sub- stantially all the assets” (presumably 70\% of gross assets and 90\% of net assets), liquidation of the S corporation or cessation of business, or ceasing to exist, or (iii) disposi- tion of stock, including by gift or death (inclusion is pro rata). Code Sec. 965(i)(4) goes on to say that upon any triggering event, the eight-year deferral under Code Sec. 965(h) can be elected, provided that, for a triggering event is described in (ii) above, the consent of the Commissioner will be needed. But Code Sec. 965(i)(2)(C) also provides an event described in number (iii) above, a disposition of stock, won’t be a triggering event if the transferee assumes the remaining net tax liability of the transferor. Proposed Reg. §1.965-7(c) provides rules for the Code Sec. 965(i) permanent deferral election for S corporation shareholders. It provides the structure for the rules relat- ing to electing the eight-year deferral after a triggering event, requiring the filing of a “consent agreement” and specifies that, in the case of a triggering event described in (ii) above, filing this agreement automatically gives rise to the necessary IRS consent to use the eight-year deferral. Proposed Reg. §1.965-7(c) also specifies rules under which a disposition of stock will not constitute a triggering event. What is required is an “eligible transferee” (someone other than a “domestic passthrough entity” such as a trust), and that transferor and eligible transferee file a “transfer agreement” with the Service. It specifies a form of “transfer agreement” to affect the assumption of the net tax liability, and makes clear that the transferor remains jointly and severally liable also. Again heads up estate planners: these new regulations give you just a 30-day window after the death of an S corporation shareholder to file the transfer agreement to preserve the permanent deferral election. But how the transfer agreement works in a death setting seems unclear.3 Notice also that the permanent deferral with respect to a particular DFIC will be available only if the S corporation has sufficient ownership of the DFIC that qualifies under Code Sec. 958(a); and if it does, then all of the DFIC’s income passing through to the S corporation (even income from domestic partnerships) will be protected by the elec- tion under Code Sec. 965(i). However, if the S corpora- tion is not a “U.S. shareholder” under Code Sec. 951(b), JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER–OCTOBER 20188 the permanent deferral election will not be available. For example, if the S corporation’s ownership of shares in the DFIC is entirely through a domestic passthrough entity (e.g., a domestic partnership) that is a U.S. shareholder of the DFIC, but its percentage interest in the domestic partnership pulls up less than 10\% of the interest in the DFIC so that the S corporation itself will not be a “U.S. shareholder” of the DFIC, the domestic partnership’s K-1 will pass through income under Code Sec. 965(a) and deduction under Code Sec. 965(c) to the S corporation, but the 965(i) election will not be available to the S cor- poration’s shareholders with respect to that DFIC to defer the related tax. See Notice 2018-26, section 3.05(b) and the VIII. D. of the Preamble to the proposed regulations.4 Section 3.04(b) of Notice 2018-26 promised us regula- tions providing that any change in a non-corporate entity’s status under Reg. §301.7701-3 after November 2, 2017, will be disregarded in the application of Code Sec. 965 if it reduces the tax otherwise due under Code Sec. 965. Proposed Reg. §1.965-4(c)(2) fulfills this promise. This will be true even if the election would properly relate back to a date before November 5, 2017. However, suppose our S corporation acquires 100\% of a C corporation on October 1, 2017 and which makes a QSub election on November 30, 2017 to be effective on October 1, 2017. This election shouldn’t be vitiated by this regulation because this election is not made under Reg. §301.7701-3, but rather under Reg. §1.1361-3. As noted above, there is a significant benefit to the shareholders of our S corporation from the application of Code Sec. 965, which has otherwise caused them to endure inclusion of substantial accumulated deferred income (in our hypothetical, $10,000,000). These amounts (in effect all of the remaining foreign source E&P of these corporations) immediately become previously taxed E&P under Code Sec. 959.5 Thus, when XYZ does repatriate these earnings as distributions, they will not be included in gross income, not even as dividends.6 So, while our S corporation share- holders won’t have available the participation deduction under Code Sec. 245A, they will have protection for these distributions to our S corporation hereafter up to the total amount of the earnings brought into taxation by Code Sec. 965. This is true even though our S corporation shareholders may not pay the Code Sec. 965 tax for many years into the future because of their permanent deferral election under Code Sec. 965(i). Of course, once distributions from these foreign corporations to our S corporation have exceeded this amount, those distributions will be dividends and will give rise to tax at the shareholder level at the 23.8\% rate.7 Moreover, under Code Sec. 961(a), all of the income taken into account by virtue of Code Sec. 965 adds to the basis of the shareholders in their stock even though a portion of that income is deductible under Code Sec. 965(c). Under Code Sec. 965(f )(2), the deductible por- tion is treated as tax-exempt income under Code Sec. 1366(a)(1)(A) and Code Sec. 1367(a)(1)(A). Proposed Reg. §1.965-3(f )(2)(ii) confirms this. But S corporations that have had a prior C corporation life catch a break; the amount of the Code Sec. 965(c) deduction is not treated as “exempt income” under Code Sec. 1368(e)(1) and will therefore be added to the Accumulated Adjustment Account under Code Sec. 1368(e)(1)(A).8 See Code Sec. 965(f )(2)(B) and Proposed Reg. §1.965-3(f )(2)(ii) and (iii) which confirms this and give us an example. Before we leave the subject of Code Sec. 965, there is an additional point to make regarding the Code Sec. 962 election. Code Sec. 962 provides an election that may be made by an individual to have his tax calculated on income coming to him under Code Sec. 951 (together with a gross- up of the foreign taxes paid by the CFC) at Code Sec. 11 rates (21\% now) which would also give him the foreign tax credit available under Code Sec. 960. We’ll see that this election may be helpful in dealing with the GILTI tax for 2018 and subsequent years. But, if the includible amount under Code Sec. 965 is sizable, it may be very unwise to make this election for 2017. It is true that the 962 election would operate to reduce the effective rates of tax imposed under Code Sec. 965 on the shareholders by up to two percentage points.9 However, the Code Sec. 962 election would cause subsequent repatriation of these earnings to be taxed as dividends (hopefully) because of Code Sec. 962(d), thus vitiating the significant benefit provided to our S corporation shareholders under Code Sec. 959(a)(1)! As we move on from Code Sec. 965, we will see that our travails as an S corporation are not ended. For 2018 and thereafter, we must contend with new Code Sec. 951A (the “GILTI” tax). Code Sec. 951A includes in the gross income of a 10\% shareholder of a foreign corporation that is a CFC an amount defined as the CFC’s GILTI (essentially the shareholder’s pro rata share of the excess of (i) net foreign source taxable income earned by the owned foreign corporation, over (ii) a 10\% return on the adjusted basis of business-related tangible personal property within these foreign corporations, determined under ADS (for XYZ, let’s say $100,000)). This tax is a big hit; for our S corporation shareholders, the tax is at 37\%, and they will also have paid the foreign tax without credit, though they seem to be able to deduct those taxes.10 The only good thing here is that they end up with previously taxed E&P under Code Sec. 959.11 Code Sec. 951A(c)(2)(A)(i)(III) specifically excludes from “tested income” any income excluded from foreign 9SEPTEMBER–OCTOBER 2018 © 2018 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. ENTITY CHOICE CORNER base company income under Code Sec. 954(b)(4). That provision excludes income that the taxpayer establishes is taxed at not less than 90\% of the Code Sec. 11 rate (“high-tax income”). Given the new Code Sec. rate (21\%), the applicable rate is 18.9\%, and we may well be able to establish that given Shangri-La’s corporate tax rate. Unfortunately, it appears that such “high-tax income” must be within foreign base company income before it can be excluded under Code Sec. 951A. If so, then this exception won’t help us. That would be too bad and inconsistent with the statutory purpose. Indeed, it sug- gests that XYZ might be better off if its CFCs re-organized in different countries so that its earnings in Shangri-La would be foreign base company income! For if its CFCs produced foreign base company income within Code Sec. 954(a), that income would be excluded both from subpart F income and from GILTI because of the application of Code Sec. 954(b)(4).12 So, what can be done about GILTI? Understand, if XYZ were a C corporation, GILTI would not be too serious a matter. That’s so because a C corporation U.S. shareholder is entitled to reduce GILTI by 50\% (under new Code Sec. 250), is subject to a 21\% base tax rate and can use the for- eign tax credit to the extent of 80\% of the foreign taxes paid or accrued by the CFC on the GILTI. [If you have sales of U.S. manufactured goods abroad for use abroad, Code Sec. 250 also offers you an additional deduction of 37.5\% for that income (called “foreign-derived intangible income”). But the deductions provided by Code Sec. 250 are apparently not available to S corporation shareholders. So there are two things you can do: (1) you can pitch the CFCs into a C corporation, or (2) elect Code Sec. 962 treatment. As noted above, Code Sec. 962 provides an election that may be made by an individual to have his tax calculated on income coming to him under Code Sec. 951 (together with a gross-up of the foreign taxes paid by the CFC) at Code Sec. 11 rates (21\% now) which would also give him the foreign tax credit available under Code Sec. 960. Presumably, an individual who is a shareholder of an S corporation can elect this treatment as to his pass-through income.13 Thus, our individual shareholder can apply Code Sec. 11 rates and the foreign tax credit is available to him. And he can make this choice year-by-year because this election is annual. However, the two deductions provided in Code Sec. 250 are not made available by the election and the previously taxed E&P treatment is likewise not available (see Code Sec. 962(d)). (I’ve been exposed to a contrary argument on Code Sec. 250 … that the 250 deductions would be available by reason of the Code Sec. 962 election, though that is not the consensus.) And, of course, the new participation deduction under Code Sec. 245A will not be available with respect to the dividend treatment we hope that results from Code Sec. 962(d).14 But we may not care. Assuming we haven’t made the Code Sec. 962 election for 2017, the 21\% rate and the foreign tax credit may be enough for two reasons. First, because our S corporation has the benefit of $10,000,000 of previously taxed E&P by reason of Code Sec. 965, the first $10,000,000 of corporate distributions from the CFCs will be exempt from tax under Code Sec. 959(a). Thus, the loss of previously taxed E&P treatment because of Code Sec. 962(d) for earnings in 2018 and subsequent years may be less important. In effect, XYZ may have covered its potential dividend needs for some time into the future given the stacking rules of Code Sec. 959(c). Appreciate that the regulations under Code Sec. 962 fol- low the same stacking rules as are imposed in Code Sec. 959(c). See Reg. §1.962-3(b). Second, given the relatively high rates of Shangri-La income taxes, the FTC may reduce the shareholder’s rate to very small numbers even without the deductions provided in new Code Sec. 250. Finally, use of the Code Sec. 962 election in 2018 or later years preserves direct use of the PTI account arising out of the Code Sec. 965 inclusion because the 962 election only applies to amounts included under Code Sec. 951 for the year of the election, and preserves our S corporation’s direct ownership of its CFCs. I’m hearing that specialists in foreign tax are looking to create C corporation holding companies. In our setting, doing so should engage the successor rule contained in Code Sec. 959(a) and Reg. §1.959-1(d) with respect to XYZ’s $10,000,000 PTI account resulting from the Code Sec. 965 inclusion. So, when the CFCs distribute their earnings that have been previously taxed under Code Sec. 965 to the new holding company, the holding company can exclude them. But when the holding company, in turn, makes a distribution to XYZ out of amounts the holding company excluded under Code Sec. 959(a), is that distribu- tion a dividend? I don’t think Code Sec. 959(d) applies to protect XYZ, and I do think the excluded amounts received by the holding company add to its earnings and profits. If we nonetheless do decide to use a C holding company to hold XYZ’s CFCs, we can simply create a new domestic subsidiary corporation and transfer the stock into it. But I’ve encountered resistance to this on the basis that doing so might have Shangri-La tax and regulatory implications. Where the CFCs are currently owned by a QSub, elimi- nating the QSub election would do the job. On the other hand, it might be possible to restructure XYZ in what is being called an “S inversion” transaction, Continued on page 52 JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER–OCTOBER 201810 Entity Choice Continued from page 10 essentially an F reorganization in which the shareholders contribute their S corporation stock into a new holding company and file a QSub election so that the existing XYZ becomes a QSub of the new hold- ing company. In effect, the existing S election automatically migrates to the holding company.15 We could then move any of our domestic assets and operations into LLCs and distribute the interests in these LLCs up to the holding company so that existing XYZ holds only the CFCs, and then terminate the QSub election leaving existing XYZ as a C corporation holding only the CFCs. Presumably, all this could be treated as an “F Reorganization.” The new holding company would be the same S corporation but with a new EIN and the old EIN would remain with XYZ, now a C corporation.16 Recall our prior discussion of section 3.04(b) of Notice 2018-26, which tells us about coming regula- tions that will make classification elections under Reg. §301.7701-3 ineffective for purposes of Code Sec. 965 if made after November 5, 2017. These concepts were incorporated into Proposed Reg. §1.965-4 entitled “disregard of certain transactions.” I don’t think I care for two reasons: (i) the changes in the status of entities are being made by the QSub elec- tion, not under Reg. §301.7701-3, and (ii) more importantly, here I’m looking to put the holdings of our S corporation into a corpora- tion to reduce the GILTI tax, not to defeat Code Sec. 965 … there should be no effect on the Code Sec. 965 tax at all and no applica- tion for either 3.04(b) of the Notice or for Proposed Reg. §1.965-4. Moreover, there is no policy reason for the Service to be grouchy about this transaction. Finally, the new law creates a struc- ture that operates to tax “base erosion” and other abuses. It is set out in Code Sec. 59A. Here we do catch a break. This provision does not apply to S cor- porations or to other corporations that have less than a three-year average of annual gross sales of $500,000,000. No more need be said. ENDNOTES 1 This, in turn, means that there won’t be a foreign tax credit given for taxes paid by the subsidiaries in Shangri-La when those dividends are paid. The gross-up and credit structure embodied in Code Sec. 78 and Code Sec. 902 has been repealed. Indeed, Code Sec. 78 survives only to gross-up a subsidiary’s foreign taxes where subpart F causes the subsidiary’s income to be directly taxed to a domestic corporation, and Code Sec. 960(a) then permits a foreign tax credit for the domes- tic corporation. This, of course, won’t help XYZ, our S corporation, because XYZ is not treated as a corporation for purposes of subpart A (the foreign tax credit) and subpart F (controlled foreign corporations) under Code Sec. 1373. 2 The calculations are (i) for non-cash assets, 39.6/35 = 1.131 × 8\% = 9.051\% and (ii) for cash assets, 39.6/35 = 1.131 × 15.5\% = 17.537\%. The deduction that achieves this rate reduction is created in Code Sec. 965(c), and the IRS tells us in section 3.06 of Notice 2018-26 that regula- tions under Code Sec. 965(o) will provide that the Code Sec. 965(c) deduction will not be an itemized deduction for purposes of the 2\% floor in pre-2018 Code Sec. 67, disallowance under post-2017 Code Sec. 67, and the AMT. Proposed Reg. §1.965-3(f )(1) confirms this. 3 Assume that death is the transfer event and that the personal representative or trustee is the transferee. Presumably, the personal rep- resentative or trustee would sign the transfer agreement on behalf of both the decedent (see Proposed Reg. §1.965-7(c)(3)(iv)(B)(3)) and the transferee. But there the music stops. Neither the personal representative nor the trustee can qualify as an “eligible transferee” because both the estate and the trust (even with a Code Sec. 645 election) are “domestic passthrough entities.” See Proposed Reg. §1.965-1(f )(19). This suggests that the Service contemplates that the “transfer” on death is not to the personal representative or trustee, but to whomever the S corporation stock is ultimately to be transferred. If so, what happens during admin- istration of the estate or trust? If the stock is to be transferred to a trust, will we be OK if it is a grantor trust? In this context, what is the effect of the grantor trust rules and Code Sec. 1361(c)(2)(A)(i) and 1361(d)(1)(A) making a QSST a grantor trust. Yipes. 4 I’m not sure why the same problem doesn’t exist with respect to the Code Sec. 965(h) eight-year deferral election. See Proposed Reg. §1.965-7(b)(1) which pointedly notes that the domestic pass-through entity must be a Code Sec. 958(a) shareholder for the domestic pass-through owner to have the (h) election available. In my example, the S corporation would not qualify. Ugh! 5 Given the election to defer payment of the tax liability created by the operation of Code Sec. 965 (called “net tax liability” in the statute) under subsections (h) and (i) of Code Sec. 965, it is hard to imagine that the benefits of exclusion under Code Sec. 959 are immediately available. But the mechanics are clear, Code Sec. 965(a) creates immediate inclusion in gross income and Code Sec. 959 provides the exclusion. 6 See Code Sec. 959(d). 7 This assumes that the dividends would be “qual- ified dividends” under Code Sec. 1(h)(11)(B), which would be so if its foreign corpora- tions are “qualified foreign corporations” within Code Sec. 1(h)(11)(C)(i)(II). For that to be true, Shangri-La must have a qualifying tax treaty with the United States within Code Sec. 1(h)(11)(C)(i)(II). In that regard, see Notice 2011-64 for the latest list of countries with such treaties. Unfortunately, Shangri-La wasn’t listed in the Notice. 8 Id. That treatment is consistent with the treat- ment of tax-exempt income under Code Sec. 1368(e)(1)(A). 9 Because the Code Sec. 962 election would impose the Code Sec. 11 rates, our sharehold- ers would be taxed at 15.5\% on cash balances rather than 17.5\%, and 8\% on non-cash bal- ances rather than 9.1\%. 10 S e e t h e p a r e n t h e t i c a l i n C o d e S e c . 951A(c)(2)(A)(ii). 11 See Code Sec. 951A(f )(1)(A). 12 Really? See Code Sec. 951A(c)(2)(A)(i)(III) and Code Sec. 954(b)(4). 13 The discussion of the Code Sec. 962 election contained in Notice 2018-26 and the provi- sions in new Proposed Reg. §1.962-2(a) clearly imply this. See also the definitions of “domestic passthrough entity” and “domestic passthrough owner” contained in Proposed Reg. §1.965-1(f ) (19) and (20), and section 3.05(b) and the discus- sion in section 5 of that Notice. Moreover, the conference committee seems to think so, also; see the text of its report at footnote 1513. 14 It is not completely clear that distributions under Code Sec. 962(d) are dividends … they should be and if so, could constitute “quali- fied dividends” under Code Sec. 1(h)(11)(B) if Shangri-La is a treaty country. 15 CCA 200941019 (Apr. 9, 2009). 16 For a more detailed description of the “S corporation inversion,” see Adam J. Tutaj, Moving the Immovable: Finding Flexibility in an F Reorganization, J. Passthrough Entities, March–April 2016, at 7. JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER–OCTOBER 201852 Copyright of Journal of Passthrough Entities is the property of CCH Incorporated and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holders express written permission. However, users may print, download, or email articles for individual use. Study Materials Pearsons Federal Taxation 2020: Corporations, Partnerships, Estates and Trusts   Anderson, K. E, Hulse, D. S., & Rupert, T. J. (Eds.). (2020). Pearsons federal taxation 2020: Corporations, partnerships, estates and trusts (33rd ed.). Pearson. ISBN-13: 978-0-13-519736-3. URL: https://www.gcumedia.com/digital-resources/pearson/2020/pearsons-federal-taxation-2020-corporations-partnerships-estates-and-trusts_33e.php Tax Code, Regulations and Official Guidance   Read Tax Code, Regulations and Official Guidance, by the Internal Revenue Service (IRS), located on the IRS website. Scroll to the section where the links to the Treasury Regulations are located and click either the Table of Contents, Retrieve most current version, or Execute full search. 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