On Jan. 2, 2019, Kevin Brady, the outgoing Republican Chairman of the House Ways and Means Committee, introduced the Tax Technical and Clerical Corrections Act (the Act). The Act’s introduction was largely symbolic because all legislation must be reintroduced in the new Congress; the new Congress started the next day. However, Representative Brady’s last act as Chairman serves as a blueprint for technical corrections to the Tax Cuts and Jobs Act of 2017 (TCJA) should the new Democratic Chairman, Richard Neal, decide to take up a technical corrections package.
Given the history of how TCJA was passed with little Democratic input, the current government shutdown, and the general bitter partisan divide in Congress it is not likely that a new technical corrections package will move forward any time soon. Nevertheless, the Act does highlight some important international tax fixes to TCJA that will likely be addressed at some point in the future. If passed, the Act’s international tax modifications would address the following:
- The deduction for the foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations. Specifically, the Act modifies how the Sec. 245A dividends received deduction (DRD) works in the case of certain tiered foreign corporations by changing the pro rata share allocation rule of Sec 951(a) to include stock that was not held on the last day of the year.
- The Act clarifies that under the special rules relating to sales or transfers involving specified 10-percent owned foreign corporations the amount included in gross income by the U.S. shareholder is treated as a dividend for purposes of the DRD. However, to the extent the dividend is a hybrid dividend this rule would not apply.
- With regard to the Sec. 965 transition tax, the Act would make two notable corrections. First, the Act clarifies several issues with calculating creditable foreign taxes, such as how earnings and profits are calculated for fiscal year taxpayers and how credits are applied to distributions of previously taxed income (PTI). The Act also specifically permits refunds and credits for taxpayers that elected to pay their transition tax in installments, overruling the IRS’s current position. The Act also addresses how certain fiscal year taxpayers must account for “extraordinary earnings and profits” and “extraordinary dispositions” during the period after Dec. 31, 2017.
- The Act clarifies certain calculations and adjustments necessary for determining the current year inclusion of global intangible low-taxed income (GILTI). This includes how distributions of PTI impact the foreign tax credit (FTC) when those amounts would have been considered GILTI.
- The Act addresses the taxable income limitation on the deduction for foreign derived intangible income (FDII) and GILTI by clarifying that the deduction under Sec. 250 cannot be negative.
- The Act also provides for a roll back of the repeal of certain stock attribution rules for determining CFC status. Specifically, the Act would restore the language under Sec. 958 regarding downward attribution while also providing for a narrow exception for limited downward attribution in order to be consistent with the intent of TCJA.
- The Act also clarifies several issues relating to the Sec. 78 gross-up. The Act provides that the Sec. 78 gross-up is not treated as a dividend for purposes of the DRD and clarifies that FTCs taken for withholding tax on PTI do not result in a Sec. 78 gross-up.
While the new Congress has not indicated whether they will take up any of the proposals in the Act, it is possible that one or more of them could appear as a footnote to other significant legislation such as an appropriations bill that ultimately funds the government in whole or in part. That being said, taxpayers should monitor these developments closely.