January 5th, 2016
The IRS has been proactive in trying to eliminate the use of planning techniques to get around subpart F and outbound transfer rules with respect to foreign goodwill. Addressing this issue, IRS Deputy Associate Chief Counsel, Marjorie Rollinson, at the International Fiscal Association USA meeting in New York, discussed proposed changes to IRC section 367 regulations.
The proposed changes to the regulations would, in effect, eliminate any section 367 exception for foreign goodwill on transfers after September 14, 2015 with some exceptions. These exceptions include the active business exception, section 367 taxes outbound transfers to foreign corporations at the time of the transfer, under 367(a), or as a deemed royalty over time, under 367(d). Prior to the proposed changes to the regulations, foreign goodwill and going concern were specifically excluded from both 367(a) and 367(d) treatment. The IRS is concerned that taxpayers use the broad definition of foreign goodwill and going concern to avoid taxation.
Under the new proposal, the IRS does away with the exclusion for foreign goodwill and going concern. Taxpayers would now elect 367(a) or 367(d) treatment for transfers of foreign goodwill or going concern. While the election is available to the taxpayer, the IRS is trying to discourage electing 367(a) treatment. They would rather taxpayers elect 367(d) to include a deemed royalty for the entire exploitation period of the transferred property. Brenda Zent, Special Advisor in the Treasury Department’s Office of International Tax Counsel, stated, “If you want certainty, put it in the (d) bucket and you won’t be challenged.” If 367(a) is applied, the IRS could challenge that choice.
A number of practitioners have voiced concerns that these proposed regulations are overreaching and do not address the actual issue. Their argument is that foreign goodwill can be something that is created by the foreign corporation in a foreign jurisdiction and, therefore, should not fall under the purview of section 367(d). One perspective is that the heart of the abusive transactions is the valuation of the foreign goodwill and should be addressed properly in the transfer pricing context. This issue has not been addressed by the proposed changes.
alliantNational, alliantgroup’s National practice, provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help businesses receive timely and precise guidance on all their tax matters. Contact us today to learn how your business can benefit from alliantgroup’s tax consulting services.